The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets
Abstract
In this lecture, the speaker will explore the pricing of tail risk as manifested in index options across international equity markets. The risk premium associated with negative tail events displays persistent shifts, largely unrelated to volatility. This tail risk premium is a potent predictor of future equity returns, while the option-implied volatility only forecasts the future equity return variation. This implies that the compensation for negative jump risk is the primary driver of the equity premium across all indices in the analysis, whereas the reward for exposure to pure diffusive variance risk is largely unrelated to future equity returns. He will also document strong commonality in the tail risk premium across countries, suggesting a high degree of integration among the major global equity markets.
About the speaker
Prof. Torben Andersen received his PhD in Economics from Yale University in 1992. He joined the Northwestern University afterwards and is currently the Nathan S and Mary P Sharp Professor of Finance at the Kellogg School of Management.
Prof. Andersen’s research focuses on modeling of volatility fluctuations in financial returns with applications to asset and derivatives pricing, portfolio selection, and the term structure of interest rates. He is also interested in the use of large data sets of high-frequency data for volatility forecasting, portfolio choice and risk management.
Prof. Andersen was the recipient of the Rigmor and Carl Holst-Knudsen Award for Scientific Research (2013). He served on the editorial board of a number of leading journals, including Journal of Financial Econometrics (2009-2014), Review of Financial Studies (2002-2005), Econometric Theory (2002-2003), Journal of Finance (2000-2003), and Management Science (1997-2000). He was also elected the International Fellow of the Center for Research in Econometric Analysis of Time Series in 2007, a fellow of the Econometric Society in 2008 and a fellow of the Society for Financial Econometrics in 2013.
