Department of Economics and Business Economics

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

Research output: Working paperResearch

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The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. / Andersen, Torben Gustav; Fusari, Nicola; Todorov, Viktor.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2018.

Research output: Working paperResearch

Harvard

Andersen, TG, Fusari, N & Todorov, V 2018 'The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Andersen, T. G., Fusari, N., & Todorov, V. (2018). The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. Aarhus: Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2018-02

CBE

Andersen TG, Fusari N, Todorov V. 2018. The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Andersen, Torben Gustav, Nicola Fusari and Viktor Todorov The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2018-02). 2018., 59 p.

Vancouver

Andersen TG, Fusari N, Todorov V. The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. Aarhus: Institut for Økonomi, Aarhus Universitet. 2018 Jan 10.

Author

Andersen, Torben Gustav ; Fusari, Nicola ; Todorov, Viktor. / The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets. Aarhus : Institut for Økonomi, Aarhus Universitet, 2018. (CREATES Research Papers; No. 2018-02).

Bibtex

@techreport{54c95a312aa048f1816d91bfeeb2e013,
title = "The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets",
abstract = "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.",
keywords = "Equity Risk Premium, International Option Markets, Predictability, Tail Risk, Variance Risk Premium",
author = "Andersen, {Torben Gustav} and Nicola Fusari and Viktor Todorov",
year = "2018",
month = "1",
day = "10",
language = "English",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets

AU - Andersen,Torben Gustav

AU - Fusari,Nicola

AU - Todorov,Viktor

PY - 2018/1/10

Y1 - 2018/1/10

N2 - 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.

AB - 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.

KW - Equity Risk Premium, International Option Markets, Predictability, Tail Risk, Variance Risk Premium

M3 - Working paper

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

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -