The DOI matches its Crossref record; 19 of the 19 references it cites were found in a registry or an index.
Recovering Risk Aversion from Option Prices and Realized Returns
Abstract
A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by options prices and realized returns on the S&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 show excess returns, even after accounting for the possibility of further crashes, transaction costs, and hedges against the downside risk.
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Cites
Density Estimation for Statistics and Data Analysis
Silverman, B. W. (2018) · Routledge eBooks · doi:10.1201/9781315140919 · Cited by 15,796
Press, W. H., Teukolsky, S. A., Vetterling, W. T., & Flannery, B. P. (1994) · Cited by 15,411
Density Estimation for Statistics and Data Analysis
(1986) · Springer eBooks · doi:10.1007/978-1-4899-3324-9 · Cited by 8,525
On estimating the expected return on the market
Merton, R. C. (1980) · Journal of Financial Economics · doi:10.1016/0304-405x(80)90007-0 · Cited by 2,806
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RUBINSTEIN, M. (1994) · The Journal of Finance · doi:10.1111/j.1540-6261.1994.tb00079.x · Cited by 1,744
The Valuation of Uncertain Income Streams and the Pricing of Options
Rubinstein, M. (1976) · The Bell Journal of Economics · doi:10.2307/3003264 · Cited by 1,618
Implied Volatility Functions: Empirical Tests
Dumas, B., Fleming, J., & Whaley, R. E. (1998) · The Journal of Finance · doi:10.1111/0022-1082.00083 · Cited by 1,248
Recovering Probability Distributions from Option Prices
JACKWERTH, J. C., & RUBINSTEIN, M. (1996) · The Journal of Finance · doi:10.1111/j.1540-6261.1996.tb05219.x · Cited by 1,086
Self-citation
Cited by
An Engine, Not a Camera: How Financial Models Shape Markets
MacKenzie, D. (2006) · doi:10.7551/mitpress/9780262134606.001.0001 · Cited by 1,766
MacKenzie, D., & Millo, Y. (2003) · American Journal of Sociology · doi:10.1086/374404 · Cited by 1,464
Option valuation with conditional skewness
Christoffersen, P., Heston, S., & Jacobs, K. (2006) · Journal of Econometrics · doi:10.1016/j.jeconom.2005.01.010 · Cited by 281
Metadata
- Authors
- Jackwerth, J. C.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 2000-04
- Volume
- 13
- Issue
- 2
- Pages
- 433-451
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W3022492005
- Cited by
- 836
- References
- 19
- FWCI
- 32.57
- Type
- journal article
- Language
- en
- Open access
- closed
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