I study the relation between option traders' risk perception and contemporaneous market conditions. Risk perception tends to increase when downside volatility increases more than upside volatility. The risk-return relation is asymmetric and nonlinear, best described as a downward-sloping reclined S-curve. That prior gains appear to have some mitigating effect on the fear of loss relative to prior losses points to a "house money" effect. Broader market conditions influence the perception of risk in a manner consistent with the "keeping up with the Joneses" effect. Leverage is a weak explanation for the risk-return relation.
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Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 77 (2004) Issue (Month): 3 (July) Pages: 527-546 Download reference. The following formats are available: HTML
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