Generalized Disappointment Aversion, Learning, and Asset Prices

Babiak, Mykola

doi:10.2139/ssrn.3084330

Cited by 2 publications

(1 citation statement)

References 45 publications

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“…For instance, models with utility functions featuring the disappointment aversion of Gul (2010) (e.g. Campanale, Castro, & Clementi, 2010), or the generalized disappointment aversion of Routledge and Zin (2010) (such as, Andries, 2019; Babiak, 2019) or the semi‐weighted utility model of Epstein and Zin (2001) are well known to be able to match several features of asset returns such as the high equity premium, low risk‐free rate, return predictability, variance, skewness risk premia in equity returns, and the downward sloping term‐structure of Sharpe ratios. However, to the best of our knowledge, there are no systematic studies of the performances of these models in an international framework.…”

Section: Modelmentioning

confidence: 99%

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

2020

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The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude towards innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labour market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the shortand long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, heterogeneity helps to explain the differences in macro quantities and equity returns observed in the international data.

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Section: Modelmentioning

confidence: 99%

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

2020

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Risk-adjusted option-implied moments

Brinkmann

Korn

2017

Rev Deriv Res

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Risk-Adjusted Option-Implied Moments AbstractOption-implied moments, like implied volatility, contain useful information about an underlying asset's return distribution, but are derived under the risk-neutral probability measure. This paper shows how to convert risk-neutral moments into the corresponding physical ones. The main theoretical result expresses moments under the physical probability measure in terms of observed option prices and the preferences of a representative investor. Based on this result, we investigate several empirical questions. We show that a model of a representative investor with CRRA utility can explain the variance risk premium for the S&P500 index but fails to capture variance and skewness risk premiums simultaneously. Moreover, we present methods to estimate forward-looking market risk premiums and investors' disappointment aversion implied in market prices. JEL Classification: G13, G17, C51, C53 1 I IntroductionThe use of option prices to gain information about the underlying's return distribution is an important idea in finance. Certainly, the most prominent example is implied volatility that goes back to Latané and Rendleman (1976) Option-implied moments have the drawback that they are formed under the riskneutral probability measure, whereas many applications require moments under the physical (real-world, actual, subjective) probability measure. Ideally, one would exploit all information contained in current option prices and have a simple but economically justified method to adjust for risk, i.e., to move from the risk-neutral moment to the corresponding physical moment. This paper provides such a method by showing explicitly how the risk adjustment depends on current option prices and risk preferences. This result has many potential uses. A specific one is to express ex-ante return moments under the physical measure, which we call risk-adjusted implied moments, in terms of observed option prices and preferences. The presented methodology 2 is very general. It applies to implied moments as in Neuberger (2012), implied moments as in Bakshi, Kapadia, and Madan (2003), which refer to log returns, and to the corresponding moments of discrete returns. It can deal with both central and non-central moments and is not restricted to a narrow class of utility functions.The empirical contributions of the paper refer to different applications of the presented methodology for the S&P500 index....

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Generalized Disappointment Aversion, Learning, and Asset Prices

Cited by 2 publications

References 45 publications

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices

Risk-adjusted option-implied moments

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