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Market Risk and Volatility in the Brazilian Stock Market

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Abstract

We estimate in this paper the market risk implied by the prices of different options traded in the Brazilian stock market. The fundamental theory to handle this problem is the one implied by the Arrow-Debreu contingent claim concept. Using that theory, we are able to construct the term structure of market risk, and to obtain a surface that provides slices for a particular “volatility smile.” The methodology that we use follows the one proposed by Shimko (1993), which is able to calculate a non-lognormal probability density function (PDF) consistent with the volatility observed in a relatively small sample of option prices. This methodology goes beyond the one proposed originally by Black and Scholes (1973), since it does not require log-normality of the PDF nor that volatility remains constant.

Suggested Citation

  • Joe Akira Yoshino, 2003. "Market Risk and Volatility in the Brazilian Stock Market," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 385-403, November.
  • Handle: RePEc:cem:jaecon:v:6:y:2003:n:2:p:385-403
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    5. Robert JARROW & Andrew RUDD, 2008. "Approximate Option Valuation For Arbitrary Stochastic Processes," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 1, pages 9-31 World Scientific Publishing Co. Pte. Ltd..
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    8. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    9. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
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    Cited by:

    1. repec:gam:jrisks:v:5:y:2017:i:4:p:52-:d:112737 is not listed on IDEAS
    2. Marcelo Bianconi & Joe Akira Yoshino, 2015. "Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 1-21, February.

    More about this item

    Keywords

    Arrow-Debreu contingent claim; options; Black-Scholes; market risk; volatility; Brazilian stock market;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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