Heterogeneity in Beliefs and Volatility Tail Behavior

37 Pages Posted: 20 Mar 2012

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business; Temple University - Fox School of Business and Management

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

George Panayotov

Hong Kong University of Science & Technology (HKUST)

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2011

Abstract

We propose a model of volatility tail behavior, in which the pricing measure dominates the physical measure in both tails of the volatility distribution and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have heterogeneity in beliefs about volatility outcomes, and maximize their utility by choosing volatility-contingent cash flows. Our empirical examination appears to suggest that the model is better suited to mimic the data counterparts in the left tail of the volatility distribution, both qualitatively and quantitatively.

Keywords: traded volatility, VIX option returns, tails of pricing and physical distributions

JEL Classification: G10, G11, G12, G13, C5, D24, D84

Suggested Citation

Bakshi, Gurdip S. and Bakshi, Gurdip S. and Madan, Dilip B. and Panayotov, George, Heterogeneity in Beliefs and Volatility Tail Behavior (November 15, 2011). Available at SSRN: https://ssrn.com/abstract=2024592 or http://dx.doi.org/10.2139/ssrn.2024592

Gurdip S. Bakshi

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

George Panayotov (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong
852-2358-5049 (Phone)
852-2358-1749 (Fax)

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