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Journal of Banking & Finance Vol. 76 2017

Option pricing under time-varying risk-aversion with applications to risk forecasting

Rüdiger Kiesel1,2; Florentin Rahe3

1 University of Duisburg-Essen · 2 University of Oslo · 3 Universität Ulm

open access

Abstract

We present a two-factor option-pricing model, which parsimoniously captures the difference in volatility persistences under the historical and risk-neutral probabilities. The model generates an S-shaped pricing kernel that exhibits time-varying risk aversion. We apply our model for two purposes. First, we analyze the risk preference implied by S&P500 index options during 2001–2009 and find that risk-aversion level strongly increases during stressed market conditions. Second, we apply our model for Value-at-Risk (VaR) forecasts during the subprime crisis period and find that it outperforms several leading VaR models.

DOI
10.1016/j.jbankfin.2016.11.006
Volume
76
Pages
120-138
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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