Tail risk premia and return predictability

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 attribut...

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Bibliographic Details
Published in:Journal of financial economics 2015-10, Vol.118 (1), p.113-134
Main Authors: Bollerslev, Tim, Todorov, Viktor, Xu, Lai
Format: Article
Language:English
Subjects:
Futures market
Rates of return
Risk premiums
Studies
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2015.02.010