Using a utility function to adjust the risk-neutral PDF embedded in cross sections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential-utility functions, we estimate the representative agent's relative risk aversion (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.ESTIMATING THE REPRESENTATIVE AGENT'S or the market's degree of risk aversion from securities prices has a long history. However, it is only recently that scholars have begun using options data to do so. Options provide a particularly promising context for studying risk preferences. Stocks are infinitely lived and so inferences must be drawn from the discounted stream of cash f lows over an indefinite horizon. Usually this involves additional assumptions as to how those cash f lows evolve (e.g., constant growth of dividends). Since only one value, the discounted present value of all cash f lows, is known, no inferences are possible about variations in preferences over different horizons. Options on the other hand have a fixed expiry date at which payoffs are realized. 1 Furthermore, options contracts exist for different investment horizons. Options thus permit studying preferences over specific horizons and simultaneously over multiple horizons. Futures contracts also share this fixed-horizon characteristic. Options * Bliss is with the Federal Reserve Bank of Chicago and Panigirtzoglou is with the Bank of England. We are particularly grateful for helpful discussions with Lars Hansen; for comments for the guidance and suggestions of the editor Richard Green; and the referee. We thank Darrin Halcomb for his excellent research assistance. The views expressed herein are those of the authors and do not necessarily ref lect those of the Federal Reserve Bank of Chicago or the Bank of England. This paper was previously titled "Recovering Risk Aversion from Options." Any remaining errors are our own. 1 American options present a somewhat more complicated investment horizon, but only to the extent that early exercise is optional. Still, even in that case, American options allow a greater specificity of investment horizon than stocks do. furthermore, several central banks track monthly changes in implied PDFs to infer changes in market sentiment. Though to be absolutely fair, this evidence is indirect and not necessarily conclusive. We know of no study that has directly tested whether it is possible to reject the stationarity of implied risk-neutral PDFs over various time intervals. 10 Of course, "failure to reject" does not mean we should "accept." Our use of the term a "good forecast" is merely an expositional convenience and should be understood as such.11 Short Sterling options were also examined but failed to produc...

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Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm ("monitoring") and their ability to cause subsequent managerial actions to reflect those assessments ("influence"). Substantial evidence supports the existence of market monitoring. However, little evidence exists on market influence, and then only for stockholders and for rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, we have not found strong evidence that stock or (especially) bond investors regularly influence managerial actions. Market influence remains, for the moment, more a matter of faith than of empirical evidence.

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm ("monitoring") and their ability to cause subsequent managerial actions to reflect those assessments ("influence"). Substantial evidence supports the existence of market monitoring. However, little evidence exists on market influence, and then only for stockholders and for rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, we have not found strong evidence that stock or (especially) bond investors regularly influence managerial actions. Market influence remains, for the moment, more a matter of faith than of empirical evidence.