Option-implied objective measures of market risk

Leiss, Matthias; Nax, Heinrich H.

doi:10.1016/j.jbankfin.2017.11.017

Cited by 20 publications

(8 citation statements)

References 46 publications

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“…Our empirical results extend those of Rompolis (2010), and Rompolis and Tzavalis (2010) from the equity market to the interest rate markets. Similarly, we contribute to the literature on risk-neutral density properties, by partially extending the results from equity markets (Bali and Murray, 2013;Leiss and Nax, 2018;Barletta et al, 2019) to the interest rate markets. This paper is organized as follows: Section 2 briefly introduces the canonical valuation notation as in Stutzer (1996).…”

Section: Introductionmentioning

confidence: 91%

Implicit Entropic Market Risk-Premium from Interest Rate Derivatives

Zambrano

Azevedo

2020

SSRN Journal

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Implicit in interest rate derivatives are Arrow-Debreu prices (or state price densities, SPDs) that contain fundamental information for risk and portfolio management in interest rate markets. To extract such information from interest rate derivatives, we propose a nonparametric method to estimate state prices based on the minimization of the Cressie-Read (Entropic) family function between potential SPDs and the empirical probability measure. An empirical application of the method, in the US interest rates and derivatives market, shows that the entropic based risk-neutral density measure highlight potential risks previous to the 2007/2008 financial crisis, and the potential arbitrage burden during the Quantitative Easing period.

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Section: Introductionmentioning

confidence: 91%

Implicit Entropic Market Risk-Premium from Interest Rate Derivatives

Zambrano

Azevedo

2020

SSRN Journal

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“…Based on the research carried out in Polish and foreign literature, it was found that there is a need to support the financial risk management process of supply chain projects, using the Foster-Hart measure, moreover, it is a littleconsidered subject. Literature is focused on this measure in the context of the use for investment in shares [Leiss, Nax 2018], and not for other projects that may or even are always associated with income's generation. The problem that is associated with the use of this measure concerns the adaptation of its form to the mentioned process.…”

Section: Foster-hart Measure and Supply Chain Projectsmentioning

confidence: 99%

The Foster-Hart Formula for Cases of Supply Chain Projects With Various Constraints

Halicki

Kwater

2019

QME

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“…Interestingly, even if one 3 Aumann & Serrano's (2008) and Foster & Hart's (2009) indices of risk have been extended to gambles with an infinite support (Homm & Pigorsch, 2012;Schulze, 2014;Riedel & Hellmann, 2015) and to gambles with uncertainty, i.e., unknown probabilities (Michaeli, 2014). These indices have also been applied to study real-life investment strategies (Kadan & Liu, 2014;Bali et al, 2015;Anand et al, 2016;Leiss & Nax, 2018). gamble second-order stochastically dominates another gamble, it is not sufficient for a uniform ranking among all risk-averse agents in every decision problem (see, e.g., the analysis of capital allocation decisions in Landsberger & Meilijson, 1993).…”

Section: Related Literature and Contributionmentioning

confidence: 99%

Short-Term Investments and Indices of Risk

Heller

Schreiber

2019

SSRN Journal

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We study various decision problems regarding short-term investments in risky assets whose returns evolve continuously in time. We show that in each problem, all risk-averse decision makers have the same (problem-dependent) ranking over short-term risky assets. Moreover, in each problem, the ranking is represented by the same risk index as in the case of CARA utility agents and normally distributed risky assets. JEL Classification: D81, G32.We analyze four decision problems that are important in economic settings. In general, different risk-averse agents rank the desirability of gambles differently. However, our main result shows that in each of these problems, all risk-averse agents have the same (problem-dependent) ranking over short-term investments in risky assets whose returns evolve continuously. Moreover, in each problem, the ranking is represented by the same risk index obtained in the commonly used mean-variance preferences (e.g., Markowitz, 1952), which are induced by CARA utility agents and normally distributed gambles. Brief Description of the ModelWe consider an agent who has to make an investment decision related to a gamble. We think of a gamble as the additive return on a financial investment. We assume that the agent has (1) an initial wealth w, and (2) a von Neumann-Morgenstern utility u that is increasing and risk-averse (i.e, u ′ > 0 and u ′′ < 0). We assume that a gamble is represented by a random variable with (1) positive expectation, and (2) some negative values in its support. For each problem the agents' choices are modeled by a decision function that assigns a number to each agent and each gamble, where a higher number is interpreted as the agent finding the gamble to be more attractive (i.e., less risky) for the relevant decision problem.We study four decision problems in the paper: (1) acceptance/rejection, in which the agent faces a binary choice between accepting and rejecting the gamble (e.g., Hart, 2011);(2) capital allocation, in which the agent has a continuous choice of how much to invest in the gamble (e.g., Markowitz, 1952; Sharpe, 1964); (3) the optimal certainty equivalent, in which the agent evaluates how much an opportunity to invest in the gamble (according to the optimal investment level) is worth to the agent (e.g., Hellman & Schreiber, 2018); and (4) risk premium, in which the agent evaluates how much investing in the gamble is inferior to obtaining the gamble's expected payoff (Arrow, 1970). 1 A risk index is a function that assigns to each gamble a nonnegative number, which is interpreted as the gamble's riskiness. We say that a risk index is consistent with a decision function f over some set of agents and gambles, if each agent in the set ranks all gambles in the set according to that risk index; that is, f assigns for each agent a higher value for gamble g than for gamble g ′ iff the risk index assigns a lower value to g. A risk-aversion index is a function that assigns to each agent a non-negative number, which is interpreted as the agent's risk aversion. We sa...

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Option-implied objective measures of market risk

Cited by 20 publications

References 46 publications

Implicit Entropic Market Risk-Premium from Interest Rate Derivatives

Implicit Entropic Market Risk-Premium from Interest Rate Derivatives

The Foster-Hart Formula for Cases of Supply Chain Projects With Various Constraints

Short-Term Investments and Indices of Risk

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