Time Variations in Risk Aversion Recovered from Option Prices PDF Download
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Author: Moshe Omer
Publisher:
ISBN:
Category :
Languages : en
Pages : 80
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Author: Moshe Omer
Publisher:
ISBN:
Category :
Languages : en
Pages : 80
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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: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Robert R. Bliss
Publisher:
ISBN:
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:
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ISBN:
Category :
Languages : en
Pages :
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Author: Jian Chen
Publisher: Springer
ISBN: 9811074283
Category : Business & Economics
Languages : en
Pages : 163
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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: Felix Brinkmann
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
Option-implied moments, like implied volatility, contain useful information about an underlying asset's return distribution but are derived under the risk-neutral probability measure. This paper provides a direct way of converting risk-neutral moments into the corresponding physical moments, which are required for many applications. The main result is a representation of physical moments in terms of observed option prices and a representative investor's preferences. As an empirical application of this result, we provide implied estimates of the representative stock market investor's disappointment aversion using S&P 500 index option prices. We find that disappointment aversion has a procyclical pattern. It is high in times of high index levels and declines when the index falls. We confirm the view that investors with high risk aversion and disappointment aversion leave the stock market during times of turbulence and reenter it after a period of high returns.
Author: Xiaoyun Zhang
Publisher:
ISBN:
Category : Risk
Languages : en
Pages : 100
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Author: René García
Publisher: Montréal : Université de Montréal, Centre de recherche et développement en économique
ISBN: 9782893823546
Category :
Languages : en
Pages : 52
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Author: Aveshen Pillay
Publisher:
ISBN:
Category :
Languages : en
Pages : 134
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