We identify and estimate the sources of risk that cause corporate bonds to earn an excess return over default-free bonds. In particular, we estimate the risk premium associated with a default event. Default is modelled using a jump process with stochastic intensity. For a large set of firms, we model the default intensity of each firm as a function of common and firm-specific factors. In the mo...

The expected returns of short maturity options are large and negative, implying a negative variance risk premium. We find that the magnitude of this negative risk premium is monotonically decreasing with option maturity. The risk premium becomes insignificant for maturities beyond 6 months and the cost to insure the variance risk using long maturity options is 6 bps per month. In the context of...

The variance risk premium, defined as the difference between the actual and riskneutral expectations of the forward aggregate market variation, helps predict future market returns. Relying on 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 compensati...

This paper studies the implications of model uncertainty under stochastic volatility model for equilibrium asset pricing. We derive the equilibrium equity premium and risk-free rate in a pureexchange economy with one representative agent who is averse not only to risk but also to model uncertainty. The results show that robustness increases the equilibrium equity premium while lowers the risk-f...

We study the optimal insurance design problem. This is a risk sharing problem between an insured and an insurer. The main novelty in this paper is that we study this optimization problem under a risk-adjusted premium calculation principle for the insurance cover. This risk-adjusted premium calculation principle uses the cost-of-capital approach as it is suggested (and used) by the regulator and...