Detlefsen, Kai Härdle, Wolfgang Karl Moro, Rouslan A.
Year of Publication:
SFB 649 Discussion Paper 2007,017
This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is reproduced by adopting the hypothesis of heterogeneous individual investors whose utility functions have a switching point between bullish and bearish attitudes. The inverse problem of finding the distribution of individual switching points is formulated in the space of stock returns by discretization as a quadratic optimization problem. The resulting distributions vary over time and correspond to different market regimes.
Utility function pricing kernel behvioral finance , risl aversion risk proclivity Heston model