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Risk-adjusted option-implied moments

Felix Brinkmann () and Olaf Korn ()
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Felix Brinkmann: Deutsche Bundesbank
Olaf Korn: University of Göttingen

Review of Derivatives Research, 2018, vol. 21, issue 2, 149-173

Abstract: Abstract This paper provides a new way of converting risk-neutral moments into the corresponding physical moments, which are required for many applications. The main theoretical result is a new analytical representation of the expected payoffs of put and call options under the physical measure in terms of current option prices and a representative investor’s preferences. This representation is then used to derive analytical expressions for a variety of ex-ante physical return moments, showing explicitly how moment premiums depend on current option prices and preferences. As an empirical application of our theoretical results, we provide option-implied estimates of the representative stock market investor’s disappointment aversion using S&P 500 index option prices. We find that disappointment aversion has a procyclical pattern. It is high in times of high index levels and declines when the index falls. We confirm the view that investors with high risk aversion and disappointment aversion leave the stock market during times of turbulence and reenter it after a period of high returns.

Keywords: Option-implied moments; Risk adjustment; Disappointment aversion; Implied preferences (search for similar items in EconPapers)
JEL-codes: G13 G17 C51 C53 (search for similar items in EconPapers)
Date: 2018
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