Department of Economics and Business Economics

The Risk Premia Embedded in Index Options

Research output: Working paperResearch

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  • rp18_07

    Final published version, 829 KB, PDF-document

  • Torben Gustav Andersen
  • Nicola Fusari, The Johns Hopkins University Carey Business School, United StatesViktor Todorov, Northwestern University, United States
We study the dynamic relation between market risks and risk premia using time series of index option surfaces. We find that priced left tail risk cannot be spanned by market volatility (and its components) and introduce a new tail factor. This tail factor has no incremental predictive power for future volatility and jump risks, beyond current and past volatility, but is critical in predicting future market equity and variance risk premia. Our findings suggest a wide wedge between the dynamics of market risks and their compensation, with the latter typically displaying a far more persistent reaction following market crises.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages70
Publication statusPublished - 1 Jan 2018
SeriesCREATES Research Papers
Number2018-07

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