A Linear Relationship between Market Prices of Risks and Risk Aversion in Complete Stochastic Volatility Models

Qian Han

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Abstract: Considering a production economy with an arbitrary von-Neumann Morgenstern utility, this paper derives a general equilibrium relationship between the market prices of risks and market risk aversion under a continuous time stochastic volatility model completed by liquidly traded options. The derived relation shows that in equilibrium the risk aversion should be a linear combination of the market price of asset risk and market price of orthogonal risk. Construction of a daily market risk aversion index is proposed to help practitioners with better risk management.

Date: 2013-10-14
New Economics Papers: this item is included in nep-rmg and nep-upt
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