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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 | : 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 | : David Weinbaum |
Publisher | : |
Total Pages | : 34 |
Release | : 2009 |
Genre | : |
ISBN | : |
Download Investor Heterogeneity, Asset Pricing and Volatility Dynamics Book in PDF, ePub and Kindle
We provide an explicit characterization of the equilibrium when investors have heterogeneous risk preferences. Given market completeness, investors can achieve full risk sharing. Thus a representative agent can be constructed, though this agent's risk aversion changes over time as the relative wealths of the individual investors change. We show that volatility depends on the covariance of aggregate risk aversion and stock returns. We find that heterogeneity increases volatility, produces volatility clustering (ARCH effects) and quot;leveragequot;-like effects. Option prices exhibit implied volatility skews. There is predictability and we assess the magnitude of investors' hedging demands and trading volume. Further, diversity is beneficial to all agents and entails welfare gains that can be substantial.
Author | : Jens Carsten Jackwerth |
Publisher | : |
Total Pages | : |
Release | : 2008 |
Genre | : |
ISBN | : |
Download Option-Implied Risk-Neutral Distributions and Risk Aversion Book in PDF, ePub and Kindle
Author | : Hersh Shefrin |
Publisher | : Elsevier |
Total Pages | : 636 |
Release | : 2008-05-19 |
Genre | : Business & Economics |
ISBN | : 0080482244 |
Download A Behavioral Approach to Asset Pricing Book in PDF, ePub and Kindle
Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory. The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition
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 | : Bernard Dumas |
Publisher | : |
Total Pages | : 34 |
Release | : 1996 |
Genre | : Options (Finance) |
ISBN | : |
Download Implied Volatility Functions Book in PDF, ePub and Kindle
Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.
Author | : Haim Levy |
Publisher | : Elsevier |
Total Pages | : 319 |
Release | : 2000-08-02 |
Genre | : Business & Economics |
ISBN | : 0080511597 |
Download Microscopic Simulation of Financial Markets Book in PDF, ePub and Kindle
Microscopic Simulation (MS) uses a computer to represent and keep track of individual ("microscopic") elements in order to investigate complex systems which are analytically intractable. A methodology that was developed to solve physics problems, MS has been used to study the relation between microscopic behavior and macroscopic phenomena in systems ranging from those of atomic particles, to cars, animals, and even humans. In finance, MS can help explain, among other things, the effects of various elements of investor behavior on market dynamics and asset pricing. It is these issues in particular, and the value of an MS approach to finance in general, that are the subjects of this book. The authors not only put their work in perspective by surveying traditional economic analyses of investor behavior, but they also briefly examine the use of MS in fields other than finance. Most models in economics and finance assume that investors are rational. However, experimental studies reveal systematic deviations from rational behavior. How can we determine the effect of investors' deviations from rational behavior on asset prices and market dynamics? By using Microscopic Simulation, a methodology originally developed by physicists for the investigation of complex systems, the authors are able to relax classical assumptions about investor behavior and to model it as empirically and experimentally observed. This rounded and judicious introduction to the application of MS in finance and economics reveals that many of the empirically-observed "puzzles" in finance can be explained by investors' quasi-rationality. Researchers use the book because it models heterogeneous investors, a group that has proven difficult to model. Being able to predict how people will invest and setting asset prices accordingly is inherently appealing, and the combination of computing power and statistical mechanics in this book makes such modeling possible. Because many finance researchers have backgrounds in physics, the material here is accessible. Emphasizes investor behavior in determining asset prices and market dynamics Introduces Microscopic Simulation within a simplified framework Offers ways to model deviations from rational decision-making
Author | : Jean-Pierre Fouque |
Publisher | : Cambridge University Press |
Total Pages | : 222 |
Release | : 2000-07-03 |
Genre | : Business & Economics |
ISBN | : 9780521791632 |
Download Derivatives in Financial Markets with Stochastic Volatility Book in PDF, ePub and Kindle
This book, first published in 2000, addresses pricing and hedging derivative securities in uncertain and changing market volatility.