Market pricing of executive stock options and implied risk preferences

Antti Pirjetä, Seppo Ikäheimo and Vesa Puttonen

Journal of Empirical Finance, 2010, vol. 17, issue 3, 394-412

Abstract: When managers get to trade in options received as compensation, their trading prices reveal several aspects of subjective option pricing and risk preferences. Two subjective pricing models are fitted to show that executive stock option prices incorporate a subjective discount. It depends positively on implied volatility and negatively on option moneyness. Further, risk preferences are estimated using the semiparametric model of Aït-Sahalia and Lo (2000). The results suggest that relative risk aversion is just above 1 for a certain stock price range. This level of risk aversion is low but reasonable, and it may be explained by the typical manager being wealthy and having low marginal utility. Related to risk aversion, it is found that marginal rate of substitution increases considerably in states with low stock prices.

Keywords: Risk; preferences; Executive; stock; options; (ESOs); Risk; aversion (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:17:y:2010:i:3:p:394-412

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