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

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 ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics