IDEAS home Printed from https://ideas.repec.org/p/zbw/sfb649/sfb649dp2006-020.html

Time dependent relative risk aversion

Author

Listed:
  • Giacomini, Enzo
  • Handel, Michael
  • Härdle, Wolfgang Karl

Abstract

Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors' behavior from a macroeconomic aspect (modeled by the investors' pricing kernel and their relative risk aversion) using stocks and options data. Daily estimates of investors' pricing kernel and relative risk aversion are obtained and used to construct and analyze a three-year long time-series. The first four moments of these time-series as well as their values at the money are the starting point of a principal component analysis. The relation between changes in a major index level and implied volatility at the money and between the principal components of the changes in relative risk aversion is found to be linear. The relation of the same explanatory variables to the principal components of the changes in pricing kernels is found to be log-linear, although this relation is not significant for all of the examined maturities.

Suggested Citation

  • Giacomini, Enzo & Handel, Michael & Härdle, Wolfgang Karl, 2006. "Time dependent relative risk aversion," SFB 649 Discussion Papers 2006-020, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2006-020
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/25103/1/512467609.PDF
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:hum:wpaper:sfb649dp2007-027 is not listed on IDEAS
    2. repec:hum:wpaper:sfb649dp2008-001 is not listed on IDEAS
    3. Bedoui, Rihab & Hamdi, Haykel, 2015. "Option-implied risk aversion estimation," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 142-152.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. René Garcia & Richard Luger & Eric Renault, 2000. "Asymmetric Smiles, Leverage Effects and Structural Parameters," Working Papers 2000-57, Center for Research in Economics and Statistics.
    2. Zhang, Han & Guo, Bin & Liu, Lanbiao, 2022. "The time-varying bond risk premia in China," Journal of Empirical Finance, Elsevier, vol. 65(C), pages 51-76.
    3. Bakshi, Gurdip & Madan, Dilip & Panayotov, George, 2010. "Returns of claims on the upside and the viability of U-shaped pricing kernels," Journal of Financial Economics, Elsevier, vol. 97(1), pages 130-154, July.
    4. Ming Pu & Gang-Zhi Fan & Seow Ong, 2012. "Heterogeneous Agents and the Indifference Pricing of Property Index Linked Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 543-569, May.
    5. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    6. Grith, Maria & Härdle, Wolfgang Karl & Schienle, Melanie, 2010. "Nonparametric estimation of risk-neutral densities," SFB 649 Discussion Papers 2010-021, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    7. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
    8. Liu, Weimin & Luo, Di & Zhao, Huainan, 2016. "Transaction costs, liquidity risk, and the CCAPM," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 126-145.
    9. repec:hum:wpaper:sfb649dp2010-021 is not listed on IDEAS
    10. Liao, Wen Ju & Sung, Hao-Chang, 2020. "Implied risk aversion and pricing kernel in the FTSE 100 index," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    11. René Garcia & Richard Luger & Eric Renault, 2001. "Empirical Assessment of an Intertemporal Option Pricing Model with Latent Variables (Note : Nouvelle version Février 2002)," CIRANO Working Papers 2001s-02, CIRANO.
    12. Zhang, Han, 2021. "An inflation-based ICAPM in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    13. Garcia, Rene & Luger, Richard & Renault, Eric, 2003. "Empirical assessment of an intertemporal option pricing model with latent variables," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 49-83.
    14. Ait-Sahalia, Yacine & Duarte, Jefferson, 2003. "Nonparametric option pricing under shape restrictions," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 9-47.
    15. Yatchew, Adonis & Hardle, Wolfgang, 2006. "Nonparametric state price density estimation using constrained least squares and the bootstrap," Journal of Econometrics, Elsevier, vol. 133(2), pages 579-599, August.
    16. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    17. Elkamhi, Redouane & Jo, Chanik, 2023. "Asset holders’ consumption risk and tests of conditional CCAPM," Journal of Financial Economics, Elsevier, vol. 148(3), pages 220-244.
    18. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic: A Unified Explanation for Equity Puzzles," MPRA Paper 68729, University Library of Munich, Germany.
    19. Christoffersen, Peter & Heston, Steven & Jacobs, Kris, 2010. "Option Anomalies and the Pricing Kernel," Working Papers 11-17, University of Pennsylvania, Wharton School, Weiss Center.
    20. Sunil S. Poshakwale & Pankaj Chandorkar, 2019. "The Impact of Aggregate and Disaggregate Consumption Shocks on the Equity Risk Premium in the United Kingdom," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 489-524, November.
    21. Huang, Lin & Wu, Jia & Zhang, Rui, 2014. "Exchange risk and asset returns: A theoretical and empirical study of an open economy asset pricing model," Emerging Markets Review, Elsevier, vol. 21(C), pages 96-116.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:sfb649:sfb649dp2006-020. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/sohubde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.