Learning, confidence, and option prices

Ivan Shaliastovich

Journal of Econometrics, 2015, vol. 187, issue 1, 18-42

Abstract: The option-market evidence suggests that investors are concerned with large downward moves in equity prices, which occur once every one to two years in the data. This evidence is puzzling because there are no concurrent jumps in macroeconomic fundamentals. I estimate a confidence-risk model where agents use a constant gain specification to learn about the unobserved expected growth from the cross-section of signals. While consumption shocks are Gaussian, investors’ uncertainty (confidence measure) is subject to jumps, which endogenously trigger jump risks in equity and option markets. The model provides a good fit to macroeconomic, equity, option, and forecast data.

Keywords: Option price; Jumps; Recursive utility; Confidence; Learning (search for similar items in EconPapers)
JEL-codes: C58 E44 G13 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407615000317
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:187:y:2015:i:1:p:18-42

DOI: 10.1016/j.jeconom.2015.02.007

Access Statistics for this article

Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().