Impact of Divergent Consumer Confidence on Option Prices
AbstractThis paper investigates the impact of divergent consumer confidence on option prices. To model this, we assume that consumers disagree on the expected growth rate of aggregate consumption. With other conditions unchanged in the discrete-time Black–Scholes option-pricing model, we show that the representative consumer will have declining relative risk aversion instead of the assumed constant relative risk aversion. In this case all options will be underpriced by the Black–Scholes model under the assumption of bivariate lognormality. Copyright Kluwer Academic Publishers 2003
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Bibliographic InfoArticle provided by Springer in its journal Review of Derivatives Research.
Volume (Year): 6 (2003)
Issue (Month): 3 (October)
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Web page: http://www.springerlink.com/link.asp?id=102989
mispricing of options; consumer confidence; heterogeneous preferences; heterogeneous beliefs; Black–Scholes model;
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- Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007.
"Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules,"
323, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
- Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative consumer's risk aversion and efficient risk-sharing rules," Journal of Economic Theory, Elsevier, vol. 137(1), pages 652-672, November.
- Hara, C. & Christoph Kuzmics, 2004. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Cambridge Working Papers in Economics 0452, Faculty of Economics, University of Cambridge.
- Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," KIER Working Papers 620, Kyoto University, Institute of Economic Research.
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