The (time-varying) importance of disaster risk

• Autores: Ivo Welch
• Localización: Financial analysts journal, ISSN-e 0015-198X, Vol. 72, Nº. 5, 2016, págs. 14-30
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • How much of the historical 7% per year equity risk premium could have been risk compensation for disasters that just happened not to have occurred? The answer can be found in below-the-money put prices, which would have protected against such disasters. Using the cost of rolling over one-month index put options, I show that the maximum possible premium for crash risk could not have accounted for more than about 2% per year, thus leaving about 5% per year for reasons other than sudden disasters. I also provide a novel ?conservative diffuse prior? approach for dealing with black swan risk.