Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/100676 
Year of Publication: 
2014
Series/Report no.: 
CFR Working Paper No. 14-07
Publisher: 
University of Cologne, Centre for Financial Research (CFR), Cologne
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

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.