Risk-adjusted option-implied moments
Felix Brinkmann () and
Olaf Korn ()
Additional contact information
Felix Brinkmann: Deutsche Bundesbank
Olaf Korn: University of Göttingen
Review of Derivatives Research, 2018, vol. 21, issue 2, 149-173
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)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11147-017-9136-4 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:21:y:2018:i:2:d:10.1007_s11147-017-9136-4
Ordering information: This journal article can be ordered from
http://www.springer. ... 29/journal/11147/PS2
Access Statistics for this article
Review of Derivatives Research is currently edited by Gurdip Bakshi and Dilip Madan
More articles in Review of Derivatives Research from Springer
Bibliographic data for series maintained by Sonal Shukla ().