Tails, Fears and Risk Premia

49 Pages Posted: 14 Apr 2010 Last revised: 26 Jan 2011

See all articles by Tim Bollerslev

Tim Bollerslev

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

Viktor Todorov

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2010


We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new Investor Fears index. The index suggests both large and time-varying compensations for fears of disasters. Our empirical investigations are essentially model-free, involving new extreme value theory approximations and high-frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out-of-the money options and new model-free implied variation measures for estimating the corresponding risk neutral expectations.

Keywords: rare events, jumps, high-frequency data, options, fears, extreme value

JEL Classification: C13, C14, G10, G12

Suggested Citation

Bollerslev, Tim and Todorov, Viktor, Tails, Fears and Risk Premia (March 5, 2010). Journal of Finance, Forthcoming, Economic Research Initiatives at Duke (ERID) Working Paper Paper No. 34, Available at SSRN: https://ssrn.com/abstract=1589719

Tim Bollerslev (Contact Author)

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Viktor Todorov

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics