Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088225 | Journal of Banking & Finance | 2017 | 60 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
RĂ¼diger Kiesel, Florentin Rahe,