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Author: Jens Carsten Jackwerth
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Languages : en
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A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by option prices and realized returns on the Samp;P500 index simultaneously. These risk aversion functions dramatically change shapes around the 1987 crash: Precrash, they are positive and decreasing in wealth and largely consistent with standard assumptions made in economic theory. Postcrash, they are partially negative and partially increasing and irreconcilable with those assumptions. Mispricing in the option market is the most likely cause. Simulated trading strategies exploiting this mispricing shows excess returns even after accounting for the possibility of further crashes, transaction costs, and hedges against the downside risk.
Author: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by option prices and realized returns on the Samp;P500 index simultaneously. These risk aversion functions dramatically change shapes around the 1987 crash: Precrash, they are positive and decreasing in wealth and largely consistent with standard assumptions made in economic theory. Postcrash, they are partially negative and partially increasing and irreconcilable with those assumptions. Mispricing in the option market is the most likely cause. Simulated trading strategies exploiting this mispricing shows excess returns even after accounting for the possibility of further crashes, transaction costs, and hedges against the downside risk.
Author: Mark Rubinstein
Publisher:
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Languages : en
Pages :
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Author: Robert R. Bliss
Publisher:
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Category :
Languages : en
Pages : 38
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Cross-sections of option prices embed the risk-neutral probability densities functions (PDFs) for the future values of the underlying asset. Theory suggests that risk-neutral PDFs differ from market expectations due to risk premia. Using a utility function to adjust the risk-neutral PDF to produce subjective PDFs, we can obtain measures of the risk aversion implied in option prices. Using FTSE 100 and Samp;P 500 options, and both power and exponential utility functions, we show that subjective PDFs accurately forecast the distribution of realizations, while risk-neutral PDFs do not. The estimated coefficients of relative risk aversion are all reasonable. The relative risk aversion estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of relative risk aversion declines with the forecast horizon and is lower during periods of high market volatility.
Author: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Moshe Omer
Publisher:
ISBN:
Category :
Languages : en
Pages : 80
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Author: Robert R. Bliss
Publisher:
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Category : Options (Finance)
Languages : en
Pages : 36
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Author: Flavio Nardi
Publisher:
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Category :
Languages : en
Pages : 32
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Book Description
In this paper I provide empirical evidence that index options implied higher moments can predict the index returns and Sharpe ratio. Specifically, I present a method to recover option implied subjective moments of the S &P500 index under the assumption of no arbitrage and logarithmic utility. Using index options prices and return data, I test the logarithmic utility assumption and obtain risk aversion estimates not statistically different from one at investment horizons of three to nine months. Under logarithmic utility, I show that the recovered subjective variance has forecasting power controlling for past realized variance. Interestingly, the risk neutral variance is larger than the subjective variance over the entire sample, an empirical fact that quantifies the implied variance premium for a log utility investor. Lastly, I also find that the forward looking Sharpe ratio implied by option prices has forecasting power; this finding can be adopted as a risk--adjusted market timing indicator to improve the return performance of either a passive indexing or a diversified portfolio investment strategy. For example, as a long term investor would rebalance their portfolio periodically to optimize or maintain their asset allocation targets (see for example, cite{ang2014asset}), they could use the option implied Sharpe ratio as a ``gauge'' of the overall market { it price level}. As such, they could take advantage of periods where there is a particularly high expected Sharpe ratio on the market to buy more of the market index when it is at lower valuation levels. Thus, this gauge serves as a reinforcing mechanism to buy low and sell high for periodic portfolio rebalancing.
Author: Jian Chen
Publisher: Springer
ISBN: 9811074283
Category : Business & Economics
Languages : en
Pages : 163
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Book Description
This book mainly addresses the general equilibrium asset pricing method in two aspects: option pricing and variance risk premium. First, volatility smile and smirk is the famous puzzle in option pricing. Different from no arbitrage method, this book applies the general equilibrium approach in explaining the puzzle. In the presence of jump, investors impose more weights on the jump risk than the volatility risk, and as a result, investors require more jump risk premium which generates a pronounced volatility smirk. Second, based on the general equilibrium framework, this book proposes variance risk premium and empirically tests its predictive power for international stock market returns.
Author: Aveshen Pillay
Publisher:
ISBN:
Category :
Languages : en
Pages : 134
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Author: Dominique Toupin
Publisher:
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Category :
Languages : en
Pages :
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Résumé en anglais
