Common Pricing of Decentralized Risk: A Linear Option Pricing Model

• 成果类型: Article
• 署名作者: Wu, Liuren; Zhang, Yuzhao
• 署名单位: City University of New York (CUNY) System; Baruch College (CUNY)
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhaf016
• 发表日期: 2025
• 页码: 1822
• 关键词: stochastic volatility

摘要

This paper proposes a top-down linear option pricing model that unifies the pricing of different option contracts not by assuming common dynamics but by imposing common pricing on each risk source in proportion to decentralized risk estimates. The model generates significantly better pricing performance than existing bottom-up models. Its high-dimensional risk structure effectively explains the options return variation, allowing for the seamless integration of option pricing with risk management. The market price of risk estimate from the model strongly predicts the future excess return of the corresponding risk-targeting option portfolio, an important dimension of attribute completely absent from prior literature.