Implied Volatility and Risk Aversion in a Simple Model with Uncertain Growth

18 Pages Posted: 10 Mar 2006 Last revised: 26 Oct 2009

Date Written: October 23, 2009

Abstract

We show that a simple equilibrium model with uncertain growth is able to simultaneously generate patterns in implied volatility and risk aversion that are similar to the ones observed in the data. In addition, the model produces an implied pricing kernel that is increasing for particular levels of wealth.

Keywords: parameter uncertainty, option pricing, implied volatility, implied risk aversion

JEL Classification: C13, G12, G13

Suggested Citation

Lundtofte, Frederik, Implied Volatility and Risk Aversion in a Simple Model with Uncertain Growth (October 23, 2009). Available at SSRN: https://ssrn.com/abstract=888744 or http://dx.doi.org/10.2139/ssrn.888744

Frederik Lundtofte (Contact Author)

Aalborg University Business School ( email )

Aalborg, DK-9220
Denmark