Heterogeneous Beliefs Option Prices And Volatility Smiles PDF Download
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| Author | : Tao Li |
| Publisher | : |
| Total Pages | : 51 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
Download Heterogeneous Beliefs, Option Prices, and Volatility Smiles Book in PDF, ePub and Kindle
In an economy in which investors with different time preferences have heterogeneous beliefs about a dividend's mean growth rate, the volatility of the stock that claims the dividend is stochastic in equilibrium. The prices of the vanilla European options that are written on this stock admit closed-form solutions, hence their hedging deltas. The Black-Scholes implied volatility surface exhibits the observed patterns that are widely documented in various options markets and depends on the wealth distribution, investors' beliefs, and subjective discount rates. In addition, the prices of barrier options and hedging deltas can be approximated at any desired level of accuracy. In some cases, barrier and one-touch option prices and their hedging deltas can be closely bounded by closed-form formulae. In summary, the options pricing model that is developed in this paper not only offers a rationale for the observed implied volatility patterns in an equilibrium setting but also is easy to use in practice. The model is calibrated to Samp;amp;P 500 index options daily from 1996 to 2006. The model fits the data pretty well and outperforms trader rules in the terms of out-of-sample valuation errors. lt;brgt;lt;brgt; A version of the model with learning, Investors' Heterogeneity and Implied Volatility Smiles, is available lt;a href=quot;https://ssrn.com/abstract=2237391quot;gt;HERElt;/agt;lt;brgt.
| Author | : Shu Feng |
| Publisher | : |
| Total Pages | : |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
Download An Empirical Examination of the Relation Between the Option-Implied Volatility Smile and Heterogeneous Beliefs Book in PDF, ePub and Kindle
An option contract is a zero-sum game, so two identical risk-averse investors would never take opposite sides of it. While they will agree on the correct option price, they would never trade with each other. Heterogeneity is essential for options trading to exist, and aggregating diverse expectations into a single market clearing price is an important function of any derivatives market. In this article, the authors look at the impact of heterogeneous beliefs about earnings, as reflected in the dispersion of analysts' forecasts in the IBES database. The effect on the market is measured by the slopes of the volatility smile for out-of-the-money (OTM) minus at-the-money (ATM) puts (left side of the smile) and OTM minus ATM calls (right side). Smiles for individual stocks are higher and more smile-shaped than for the SPX index and show significant and interesting effects from the explanatory variables, including firm size, liquidity, market volatility, and book-to-market. But controlling for those effects, dispersion in earnings forecasts raises OTM IVs relative to ATM IVs, both in regressions and in portfolio sorts. Interesting differences appear between systematic and idiosyncratic components of the smile slope, with systematic effects especially important for OTM puts, while OTM calls are more influenced by the idiosyncratic component.
| Author | : Tao Li |
| Publisher | : |
| Total Pages | : 41 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Download Investors' Heterogeneity and Implied Volatility Smiles Book in PDF, ePub and Kindle
Heterogeneity in beliefs and time preferences among investors make stock volatility stochastic, even though the volatility of the underlying dividend is constant. The prices of the European options written on this stock admit closed-form solutions, hence their hedging deltas. The Black-Scholes implied volatility surface, which depends on wealth distribution, investors' beliefs and time preferences, exhibits observed patterns that are widely documented in various options markets. Along with benchmark models, the model is calibrated weekly to the S&P 500 index options from January 1996 to April 2006. It shows comparable performance to the SVJ model and outperforms the traders' rules and two no-arbitrage models (SV and SVSI) in terms of out-of-sample pricing errors.
| Author | : Alexandre C. Ziegler |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 205 |
| Release | : 2012-11-02 |
| Genre | : Business & Economics |
| ISBN | : 3540247556 |
Download Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance Book in PDF, ePub and Kindle
After a brief review of the existing incomplete information literature, the effect of incomplete information on investors' exptected utility, risky asset prices, and interest rates is described. It is demonstrated that increasing the quality of investors' information need not increase their expected utility and the prices of risky assets. The impact of other factors is discussed in detail. It is also demonstrated that financial markets in general do not aggregate information efficiently, a fact that can explain the equity premium puzzle.
| Author | : Joram Mayshar |
| Publisher | : |
| Total Pages | : 39 |
| Release | : 1997 |
| Genre | : |
| ISBN | : |
Download Heterogeneity and Option Pricing Book in PDF, ePub and Kindle
We consider equilibrium option pricing in a simple two-period economy that is characterized by heterogeneity among agents. We demonstrate that an economy in which agents have constant yet heterogeneous degrees of relative risk aversion will price assets as though it has a single quot;pricing representativequot; agent who displays decreasing relative risk aversion. This result is shown to imply that the pricing kernel has fat tails and yields option prices which do not conform to the standard Black-Scholes formula. Solving for the implied volatility results in a smile pattern, typical of those seen in practice. This pattern was in fact obtained is several cases. Even though we assume a lognormal distribution of the underlying return, we obtain that heterogeneity in either risk aversion or in beliefs concerning the distribution parameters implies a non-lognormal pricing kernel with fatter tails and with quot;over-pricingquot; of out-of-the-money call and put options.
| Author | : Alan Kraus |
| Publisher | : |
| Total Pages | : |
| Release | : 1998 |
| Genre | : |
| ISBN | : |
Download Heterogeneous Beliefs and the Effect of Replicatable Options on Asset Prices Book in PDF, ePub and Kindle
We present two ways in which trading in a replicatable option can affect the price process of the underlying asset. In the first situation, trading an option that each investor views as payoff-redundant breaks a non-fully-revealing equilibrium that exists when the option market is absent. The second situation involves a market that is dynamically complete without options but in which introducing an option market allows self-confirming conjectures of additional uncertainty about the future price of the underlying asset. Heterogeneous beliefs play important, though different, roles in both situations.
| Author | : Andrea Buraschi |
| Publisher | : |
| Total Pages | : 60 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
Download Model Uncertainty and Option Markets in Heterogeneous Economies Book in PDF, ePub and Kindle
This paper provides option pricing and volume implications for an incomplete market economy with heterogenous agents who face model uncertainty and disagree on the dividend growth rate. Market incompleteness makes options non-redundant while heterogeneity creates a link between differences in beliefs and option volumes. We solve for both option prices and volumes and test the joint empirical implications using SP500 index option data. We use survey data to build an Index of Dispersion in Beliefs and find that a model which takes into account information heterogeneity can explain the dynamics of option volume better than reduced-form models with stochastic volatility. Moreover, its hedging performance is superior. Finally, we find that the Index of Dispersion in Beliefs is correlated with changes in the shape of the smile and it forecasts future realized volatility even after controlling for the current implied volatility.
| Author | : Alessandro Beber |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2009 |
| Genre | : |
| ISBN | : |
Download Differences in Beliefs and Currency Risk Premia Book in PDF, ePub and Kindle
This paper studies the importance of heterogeneous beliefs for the dynamics of asset prices. We focus on currency markets, where the absence of short-selling constraints allows us to perform sharper tests of theoretical predictions. We examine both option and underlying markets, so that we can study a richer array of empirical implications that include both volatility risk premia and expected returns. Using a unique data set with detailed information on the foreign-exchange forecasts of about 50 market participants over more than ten years, we construct an empirical proxy for differences in beliefs. We show that this proxy has a statistically and economically strong effect on the implied volatility of currency options beyond the volatility of current macroeconomic fundamentals. We document that differences in beliefs impact also on the shape of the implied volatility smile, on the volatility risk-premia, and on future currency returns. Our evidence demonstrates that a process related to the uncertainty about fundamentals has important asset pricing implications.
| Author | : Bartley R. Danielsen |
| Publisher | : |
| Total Pages | : 314 |
| Release | : 1999 |
| Genre | : |
| ISBN | : |
Download Why Do Option Introductions Depress Stock Prices? Book in PDF, ePub and Kindle
| Author | : Tao Li |
| Publisher | : |
| Total Pages | : 37 |
| Release | : 2006 |
| Genre | : |
| ISBN | : |
Download Heterogeneous Beliefs, Asset Prices, and Volatility in a Pure Exchange Economy Book in PDF, ePub and Kindle
This paper extends the Lucas (1978) model to a setting in which investors have heterogeneous beliefs about the structure of a dividend process. By assuming that all investors have logarithmic preferences and different subjective discount rates, we can obtain a closed-form representation of the stock price. This closed-form solution enables us to analyze the dynamics of the stock price and its volatility. The model can simutaneously generate several well-known empirical facts - excessive volatility, leverage effects, and positive relationships between price and trading volume and between volatility and volume. All of these effects are driven by the different beliefs of investors.
