Using long term implied volatilities to assess past and present U.S. stock prices

Miguel Cantillo Simon (miguel.cantillo@ucr.ac.cr)
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Miguel Cantillo Simon: Universidad de Costa Rica

No 201908, Working Papers from Universidad de Costa Rica

Abstract: This paper empirically analyzes a model that relates earnings price ratios to long term risk free rates and implied volatilities. The two periods with sufficient available data are 1890-1933, and 2007-2019. I estimate that modern investors have relative risk aversion of 1.34 and a time preference discount of 2.77%,while their historical counterparts have a relative risk aversion of 1.50 and a 6.42% discount. The paper studies if prices were efficient in Black’s (1986) sense, and finds that while an error correction model works well for the modern period, and for 1890 to 1927, coherence breaks down completely from 1928 to 1933.

Pages: 22 pages
Date: 2019-12, Revised 2019-12
New Economics Papers: this item is included in nep-his
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