Market Prices of Orthogonal Risk and Risk Aversion in Complete Stochastic Volatility Models: Theoretical and Empirical

37 Pages Posted: 19 Oct 2010

See all articles by Qian Han

Qian Han

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Date Written: October 18, 2010

Abstract

Considering a production economy with an arbitrary von-Neumann Morgenstern utility, this paper derives a general equilibrium relationship between the market prices of risks and market risk aversion under a continuous time stochastic volatility model completed by liquidly traded options. Empirical market price of orthogonal risk and risk aversion surfaces as well as their time series are obtained from traded option prices. It is found that implied risk aversion exhibits a smiling pattern across strikes and highly correlates with regular macrofinance variables.

Keywords: Market Price of Orthogonal Risk, Risk Aversion, Stochastic Volatility Model

JEL Classification: G12, D51

Suggested Citation

Han, Qian and Turvey, Calum G., Market Prices of Orthogonal Risk and Risk Aversion in Complete Stochastic Volatility Models: Theoretical and Empirical (October 18, 2010). Available at SSRN: https://ssrn.com/abstract=1694116 or http://dx.doi.org/10.2139/ssrn.1694116

Qian Han (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

HOME PAGE: http://www.wise.xmu.edu.cn

Calum G. Turvey

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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