Heterogeneity and Option Pricing

An economy with agents having constant yet heterogeneous degrees of relative risk aversion prices assets as though there were a single decreasing relative risk aversion ''pricing representative'' agent. The pricing kernel has fat tails, and option prices do not conform to the Bla...

Full description

Saved in:
Bibliographic Details
Published in:Review of derivatives research 2000, Vol.4 (1), p.7
Main Authors: Benninga, Simon, Mayshar, Joram
Format: Article
Language:English
Subjects:
Consumers
Consumption
Endowment
Equilibrium
Expected utility
Investments
Investors
Methods
Options markets
Options trading
Prices
Put & call options
Risk aversion
Securities prices
Studies
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:An economy with agents having constant yet heterogeneous degrees of relative risk aversion prices assets as though there were a single decreasing relative risk aversion ''pricing representative'' agent. The pricing kernel has fat tails, and option prices do not conform to the Black-Scholes formula. Implied volatility exhibits a ''smile.'' Heterogeneity as the source of non-stationary pricing fits Rubenstein's (1994) interpretation of the ''over-pricing'' as an indication of ''crash-o-phobia''. Rubinstein's term suggests that those who hold out-of-the money put options have relatively high risk aversion (or relatively high subjective probability assessments of low market outcomes). The essence of this explanation is investor heterogeneity. [PUBLICATION ABSTRACT]
ISSN:1380-6645
1573-7144
DOI:10.1023/A:1009639211414