Abstract
We characterize a set of risk-neutral measures associated with a comprehensive class of risk averse investors. From this set, we show how to construct option price bounds and recover the implied γ: a parameter uniquely identifying the marginal investor pricing a given option. Empirically, we find that S&P 500 option prices are reconciled by heterogeneous marginal investors who differ in their assessment of tail risk. This heterogeneity is time-varying, decreases during financial crises, and provides novel insights into the skew patterns of index options. The recovered investors’ preferences related to compensation for downside risk help predict future market returns.
| Original language | English |
|---|---|
| Pages (from-to) | 174-205 |
| Number of pages | 32 |
| Journal | Journal of Financial Economics |
| Volume | 144 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - Apr 2022 |
| Externally published | Yes |
Bibliographical note
Funding Information:We would like to thank the editor Bill Schwert, an anonymous referee, Yacine Ait-Sahalia, Torben Andersen (discussant), Markus Brunnermeier, Ricardo Cavalcanti, Darrell Duffie, Marcelo Fernandes, Ren? Garcia, Felipe Iachan, Jens Jackwerth, Kris Jacobs, Estev?o Rosalino Junior (discussant), Humberto Moreira, Jonathan Payne, Ruy Ribeiro, Paul Schneider, Jo?o Thereze, Sergio Werlang, Jason Zhang, seminar participants at the Brazilian School of Economics and Finance, Erasmus School of Economics, University of Liverpool and SoFiE Seminar Series, and conference participants at the 20th Brazilian Finance Meeting and 42nd Meeting of the Brazilian Econometric Society for useful comments and suggestions. This study was financed in part by the Coordena??o de Aperfei?oamento de Pessoal de N?vel Superior - Brasil (CAPES) - Finance Code 001. The second author acknowledges financial support from the Brazilian Financial and Capital Markets Association (ANBIMA).
Funding Information:
We would like to thank the editor Bill Schwert, an anonymous referee, Yacine Ait-Sahalia, Torben Andersen (discussant), Markus Brunnermeier, Ricardo Cavalcanti, Darrell Duffie, Marcelo Fernandes, René Garcia, Felipe Iachan, Jens Jackwerth, Kris Jacobs, Estevão Rosalino Junior (discussant), Humberto Moreira, Jonathan Payne, Ruy Ribeiro, Paul Schneider, João Thereze, Sergio Werlang, Jason Zhang, seminar participants at the Brazilian School of Economics and Finance, Erasmus School of Economics, University of Liverpool and SoFiE Seminar Series, and conference participants at the 20th Brazilian Finance Meeting and 42nd Meeting of the Brazilian Econometric Society for useful comments and suggestions. This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - Brasil (CAPES) - Finance Code 001. The second author acknowledges financial support from the Brazilian Financial and Capital Markets Association (ANBIMA).
Publisher Copyright:
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