Department of Economics and Business Economics

The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets

Research output: Working paper


  • rp18_02

    Final published version, 2 MB, PDF-document

  • Torben Gustav Andersen
  • Nicola Fusari, The Johns Hopkins University Carey Business School, United StatesViktor Todorov, Northwestern University, United States
We explore the pricing of tail risk as manifest in index options across international equity markets. The risk premium associated with negative tail events displays persistent shifts, unrelated to volatility. This tail risk premium is a potent predictor of future equity returns, while option-implied volatility only forecasts the future return variation. Hence, compensation for negative jump risk is the primary driver of the equity premium across all indices, whereas the reward for pure diffusive variance risk is largely unrelated to future equity returns. We also document pronounced commonalities, suggesting a high degree of integration among the major global equity markets.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages59
StatePublished - 10 Jan 2018
SeriesCREATES Research Papers

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