Noisy Chaos in a Large System of Decision-Makers with Heterogeneous Beliefs with Application to Index Option Prices

2014 ◽  
Vol 31 (4) ◽  
pp. 487-501 ◽  
Author(s):  
Godfrey Cadogan
Keyword(s):  
Large System ◽  
Heterogeneous Beliefs ◽  
Decision Makers ◽  
Option Prices ◽  
Index Option ◽  
Noisy Chaos

scholarly journals Option-Based Estimation of the Price of Coskewness and Cokurtosis Risk

2020 ◽  
pp. 1-27
Author(s):  
Peter Christoffersen ◽  
Mathieu Fournier ◽  
Kris Jacobs ◽  
Mehdi Karoui
Keyword(s):  
Risk Premium ◽  
Risk Premia ◽  
Factor Models ◽  
Option Prices ◽  
Variance Risk Premium ◽  
Market Return ◽  
Price Of Risk ◽  
Variance Risk ◽  
Index Option

Abstract We show that the prices of risk for factors that are nonlinear in the market return can be obtained using index option prices. The price of coskewness risk corresponds to the market variance risk premium, and the price of cokurtosis risk corresponds to the market skewness risk premium. Option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An analysis of factor models with coskewness risk indicates that the new estimates of the price of risk improve the models’ performance compared with regression-based estimates.

Do the Option Prices Forecast Spot Price? Evidence from the KOSPI 200 Index Option Market

2011 ◽  
Vol 19 (3) ◽  
pp. 251-280
Author(s):  
Byungwook Choi
Keyword(s):  
Implied Volatility ◽  
Parametric Method ◽  
Trading Strategy ◽  
Stock Index ◽  
Rate Of Return ◽  
Spot Price ◽  
Option Prices ◽  
Daily Rate ◽  
Risk Neutral ◽  
Index Option

This study investigates a forecasting power of volatility curvatures and risk neutral densities implicit in KOSPI 200 option prices by analyzing minute by minute historical index option intraday trading data from January of 2007 to January of 2011. We begin by estimating implied volatility functions and risk neutral price densities based on non-parametric method every minute and by calculating volatility curvature and skewness premium. We then compare the daily rate of return of the signal following trading strategy that we buy (sell) a stock index when the volatility curvature or skewness premium increases (decreases) with that of an intraday buy-and-hold strategy that we buy a stock index on 9:05AM and sell it on 2:50PM. We found that the rate of return of the signal following trading strategy was significantly higher than that of the intraday buy-and-hold strategy, which implies that the option prices have a strong forecasting power on the direction of stock market. Another finding is that the information contents of option prices disappear after three or four minutes.

Index Option Prices and Stock Market Momentum

2004 ◽  
Vol 77 (4) ◽  
pp. 835-874 ◽  
Author(s):  
Kaushik Amin ◽  
Joshua D. Coval ◽  
H. Nejat Seyhun
Keyword(s):  
Stock Market ◽  
Option Prices ◽  
Index Option

A Tractable Framework for Option Pricing with Dynamic Market Maker Inventory and Wealth

2019 ◽  
Vol 55 (4) ◽  
pp. 1117-1162
Author(s):  
Mathieu Fournier ◽  
Kris Jacobs
Keyword(s):  
Stochastic Volatility ◽  
Risk Premium ◽  
Reduced Form ◽  
Market Maker ◽  
Option Prices ◽  
Stochastic Volatility Models ◽  
Variance Risk Premium ◽  
Volatility Models ◽  
Variance Risk ◽  
Index Option

We develop a tractable dynamic model of an index option market maker with limited capital. We solve for the variance risk premium and option prices as a function of the asset dynamics and market maker option holdings and wealth. The market maker absorbs end users’ positive demand and requires a more negative variance risk premium when she incurs losses. We estimate the model using returns, options, and inventory and find that it performs well, especially during the financial crisis. The restrictions imposed by nested existing reduced-form stochastic-volatility models are strongly rejected in favor of the model with a market maker.

Implied Risk Preferences from Option Prices: Evidence from KOSPI 200 Index Options

2008 ◽  
Vol 16 (2) ◽  
pp. 1-35
Author(s):  
Byung Jin Kang ◽  
Tong Suk Kim ◽  
Sun Joong Yoon
Keyword(s):  
Risk Aversion ◽  
Risk Premium ◽  
Option Prices ◽  
Estimation Errors ◽  
Asset Return ◽  
Empirical Results ◽  
Internal Inconsistency ◽  
Functional Forms ◽  
Time Invariant ◽  
Index Option

In this paper, we investigated the risk averse ness of KOSPI 200 option investors with very flexible risk preference structure. Contrary to the most of previous research either assuming a time-invariant underlying asset return distribution or assuming a well-known functional form for the underlying utility functions. we directly assume functional forms for Investors’risk aversion functions. With the direct specification on the risk aversion functions themselves. we can avoid the possibility 이 suffering from Internal inconsistency and of obtaining misleading risk aversion functions. From our empirical results using KOSPI 200 Index option prices from 1997 through 2006. we discovered that the investors' relative risk aversions exhibit ‘sharply decreasing' across wealth. In addition, our Implied subjective PDFs are found to more accurately forecast the distribution of realization than both the risk neutral PDFs and implied subjective PDFs from previous methods. For the robustness of our empirical results, we test the effects of estimation errors In the expected risk premium, and of financial crisis in the late of 1990s.

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