Format:
1 Online-Ressource (61 p)
Content:
This paper proposes a preference-based general equilibrium model that explains the pricing of the S&P 500 index options since the 1987 market crash. The central ingredients are a peso component in the consumption growth rate and the time-varying risk aversion induced by habit formation that amplifies consumption shocks. The amplifying effect generates the excess volatility and a large jump-risk premium which combine to produce a pronounced volatility smirk for options written on the aggregate stock. The time-varying volatility and jump-risk premia enable the model to account for the state-dependent smirk patterns observed in the data as well. Besides volatility smirks, the model has a variety of other pricing implications, such as the high equity premium, the option term structure, and variations of price-dividend ratios across time, which are broadly consistent with the aggregate stock and option market data
Note:
In: Journal of Financial Economics, Forthcoming
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Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 26, 2009 erstellt
Language:
English
