Implied Risk Aversion Parameter from Option Prices

Kenneth S Bartunek and Mustafa Chowdhury

The Financial Review, 1997, vol. 32, issue 1, 107-24

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.

Date: 1997
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