Option-Implied Preference with Model Uncertainty

We present a theoretical model of option-implied preferences with model uncertainty. An option-implied risk aversion function with model uncertainty has a higher and a steeper level of risk aversion than an investor without model uncertainty. Based on the theoretical model, we try to extract empirical option-implied risk aversion functions with S&P 500 index options. Our empirical option-implied risk aversion with model uncertainty and option-implied uncertainty premium show a decreasing and a smirk pattern across wealth. After subprime crisis, the shape of option-implied risk aversion function with model uncertainty is not quite different, and both the level of option-implied risk aversion function and the option-implied uncertainty premium become slightly lowered. (c) 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:498-515, 2014
Publisher
WILEY-BLACKWELL
Issue Date
2014-06
Language
ENG
Keywords

ROBUST PORTFOLIO RULES; RISK-AVERSION; KNIGHTIAN UNCERTAINTY; PRICES; EQUILIBRIUM; CONSUMPTION; VOLATILITY; AMBIGUITY; RETURNS; UTILITY

Citation

JOURNAL OF FUTURES MARKETS, v.34, no.6, pp.498 - 515

ISSN
0270-7314
DOI
10.1002/fut.21660
URI
http://hdl.handle.net/10203/189008
Appears in Collection
KGSF-Journal Papers(저널논문)
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