Department of Economics and Business Economics

Torben Gustav Andersen

The Risk Premia Embedded in Index Options

Research output: Working paperResearch


  • rp14_56

    Submitted manuscript, 920 KB, PDF document

  • Torben Gustav Andersen
  • Nicola Fusari, The Johns Hopkins University Carey Business School, Denmark
  • Viktor 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 it 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 crisis.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages55
Publication statusPublished - 16 Dec 2014
SeriesCREATES Research Papers

    Research areas

  • Option pricing, Risk premia, Jumps, Stochastic volatility, Return predictability, Risk aversion, Extreme events

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