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Post by Sapphire Capital on Aug 14, 2008 21:27:37 GMT 4
Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities Tim Bollerslev Duke University - Finance; Trinity College of Arts & Sciences - Department of Economics; National Bureau of Economic Research (NBER) Michael Gibson Hao Zhou August 16, 2007 CREATES Research Paper 2007-16 Abstract: This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment confirms that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities indicates significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1150068_code357906.pdf?abstractid=1150068&mirid=3
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