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Implied Risk Aversion Parameter from Option Prices

Author

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  • Bartunek, Kenneth S
  • Chowdhury, Mustafa

Abstract

This paper estimates the representative investor's coefficient of relative risk aversion using option price data. Estimation is carried out using the method of simulated moments. Employing the following assumptions: a) agents have constant proportional risk averse preferences, b) complete markets exist, and c) asset returns are distributed lognormally, an objective function is constructed within the equivalent martingale measure framework. Unlike the case of equity markets, the implied risk aversion parameter from option prices is quite low and stays between zero and one. Copyright 1997 by MIT Press.

Suggested Citation

  • Bartunek, Kenneth S & Chowdhury, Mustafa, 1997. "Implied Risk Aversion Parameter from Option Prices," The Financial Review, Eastern Finance Association, vol. 32(1), pages 107-124, February.
    • Handle: RePEc:bla:finrev:v:32:y:1997:i:1:p:107-24
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    Cited by:

    1. d'Amore, Federico & Bezzo, Fabrizio, 2017. "Managing technology performance risk in the strategic design of biomass-based supply chains for energy in the transport sector," Energy, Elsevier, vol. 138(C), pages 563-574.
    2. Qian Han & Calum G. Turvey, 2013. "A Robust Equilibrium Relationship between Market Prices of Risks and Risk Aversion in Dynamically Complete Stochastic," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    3. Néstor Gandelman & Rafael Porzecanski, 2013. "Happiness Inequality: How Much is Reasonable?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 110(1), pages 257-269, January.
    4. Liao, Wen Ju & Sung, Hao-Chang, 2020. "Implied risk aversion and pricing kernel in the FTSE 100 index," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    5. Horatio Cuesdeanu & Jens Carsten Jackwerth, 2018. "The pricing kernel puzzle: survey and outlook," Annals of Finance, Springer, vol. 14(3), pages 289-329, August.
    6. Gandelman, Néstor & Hernández-Murillo, Rubén, 2013. "What do happiness and health satisfaction data tell us about relative risk aversion?," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 301-312.
    7. Etelvina Stefani Chavez & Gastón Milanesi & Gabriela Pesce, 2021. "Aversión al riesgo implícita en los precios de mercado de diferentes activos financieros de Argentina," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-23, Enero - M.
    8. Robert R. Bliss & Nikolaos Panigirtzoglou, 2001. "Recovering risk aversion from options," Working Paper Series WP-01-15, Federal Reserve Bank of Chicago.
    9. Qian Han, 2013. "A Linear Relationship between Market Prices of Risks and Risk Aversion in Complete Stochastic Volatility Models," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    10. Driouchi, Tarik & Trigeorgis, Lenos & So, Raymond H.Y., 2020. "Individual antecedents of real options appraisal: The role of national culture and ambiguity," European Journal of Operational Research, Elsevier, vol. 286(3), pages 1018-1032.

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