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Risk Aversion, Intertemporal Substitution, and Option Pricing

  • René Garcia

    (Crest)

  • Eric Renault

    (Crest)

This paper develops a general stochastic framework and an equilibrium asset pricing model theat make clear how attitudes towards intertemporal substitution and risk matter for option pricing; In particular we show under which statistical conditions option princing formulas are not preference-free, in other words when preferences are not hidden in the stock and bond prices as they are in the standard Black and Scholes (BS) or Hull and White (HW) pricing formulas.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 98-10.

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Date of creation: 1998
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Handle: RePEc:crs:wpaper:98-10
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