Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities

31 Pages Posted: 25 Jan 2005 Last revised: 13 Mar 2009

See all articles by Tim Bollerslev

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Michael S. Gibson

Board of Governors of the Federal Reserve System

Hao Zhou

Tsinghua University - PBC School of Finance; SUSTech Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2008

Abstract

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment confirms that the procedure works well in practice. Implementing the procedure with actual S&P500 option-implied volatilities and high-frequency five-minute-based realized volatilities indicate significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns.

Keywords: Stochastic Volatility Risk Premium, Model-Free Implied Volatility, Model-Free Realized Volatility, Black-Scholes, GMM Estimation, Return Predictability

JEL Classification: G12, G13, C51, C52

Suggested Citation

Bollerslev, Tim and Gibson, Michael S. and Zhou, Hao, Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities (July 1, 2008). FEDS Working Paper No. 2004-56, AFA 2006 Boston Meetings Paper, Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=614543

Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
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Duke University - Department of Economics

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National Bureau of Economic Research (NBER)

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Michael S. Gibson

Board of Governors of the Federal Reserve System ( email )

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Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong 518055
China

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