Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100676
Authors: 
Brinkmann, Felix
Korn, Olaf
Year of Publication: 
2014
Series/Report no.: 
CFR Working Paper 14-07
Abstract: 
Option-implied moments, like implied volatility, contain useful information about an underlying asset's return distribution, but are derived under the risk-neutral probability measure. This paper shows how to convert risk-neutral moments into the corresponding physical ones. The main theoretical result expresses moments under the physical probability measure in terms of observed option prices and the preferences of a representative investor. Based on this result, we investigate several empirical questions. We show that a model of a representative investor with CRRA utility can explain the variance risk premium for the S&P500 index but fails to capture variance and skewness risk premiums simultaneously. Moreover, we present methods to estimate forward-looking market risk premiums and investors' disappointment aversion implied in market prices.
Subjects: 
option-implied moments
risk adjustment
variance risk premium
market risk premium
disappointment aversion
JEL: 
G13
G17
C51
C53
Document Type: 
Working Paper

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