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Risk Aversion, Intertemporal Substitution, and Option Pricing

  • Garcia, R.
  • Renault, E.

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 interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 9801.

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Length: 45 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:mtl:montec:9801
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  27. repec:fth:inseep:9329 is not listed on IDEAS
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