TY - JOUR
T1 - Tail risk premia and return predictability
AU - Bollerslev, Tim
AU - Todorov, Viktor
AU - Xu, Lai
N1 - Funding Information:
The research was supported by a grant from the NSF to the NBER, and CREATES funded by the Danish National Research Foundation (Bollerslev). We are grateful to an anonymous referee for her/his very useful comments. We would also like to thank Caio Almeida, Reinhard Ellwanger, Asaf Manela and seminar participants at NYU Stern, the 2013 SETA Meetings in Seoul, South Korea, the 2013 Workshop on Financial Econometrics in Natal, Brazil, the 2014 SCOR/IDEI conference on Extreme Events and Uncertainty in Insurance and Finance in Paris, France, the 2015 Midwest Finance Association meetings, Chicago and University of California Berkeley for their helpful comments and suggestions.
Publisher Copyright:
© 2015 Elsevier B.V.
Copyright:
Copyright 2015 Elsevier B.V., All rights reserved.
PY - 2015/10/1
Y1 - 2015/10/1
N2 - The variance risk premium, defined as the difference between the actual and risk-neutral expectations of the forward aggregate market variation, helps predict future market returns. Relying on a new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the part of the variance risk premium associated with the special compensation demanded by investors for bearing jump tail risk, consistent with the idea that market fears play an important role in understanding the return predictability.
AB - The variance risk premium, defined as the difference between the actual and risk-neutral expectations of the forward aggregate market variation, helps predict future market returns. Relying on a new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the part of the variance risk premium associated with the special compensation demanded by investors for bearing jump tail risk, consistent with the idea that market fears play an important role in understanding the return predictability.
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U2 - 10.1016/j.jfineco.2015.02.010
DO - 10.1016/j.jfineco.2015.02.010
M3 - Article
AN - SCOPUS:84941599505
VL - 118
SP - 113
EP - 134
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 1
ER -