Heterogeneity in Beliefs and Volatility Tail Behavior
37 Pages Posted: 20 Mar 2012
There are 2 versions of this paper
Heterogeneity in Beliefs and Volatility Tail Behavior
Heterogeneity in Beliefs and Volatility Tail Behavior
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: Suggested Citation
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