Cumulative Prospect Theory, Option Returns, and the Variance Premium

• 成果类型: Article
• 署名作者: Baele, Lieven; Driessen, Joost; Ebert, Sebastian; Londono, Juan M.; Spalt, Oliver G.
• 署名单位: Tilburg University; Frankfurt School Finance & Management; Federal Reserve System - USA; Federal Reserve System Board of Governors
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhy127
• 发表日期: 2019
• 页码: 3667
• 关键词: lifetime portfolio selection; risk-aversion; PRICING KERNELS; stock returns; probability; volatility; CHOICE; preference; skewness; utility

摘要

We develop a tractable equilibrium asset pricing model with cumulative prospect theory (CPT) preferences. Using GMM on a sample of U.S. equity index option returns, we show that by introducing a single common probability weighting parameter for both tails of the return distribution, the CPT model can simultaneously generate the otherwise puzzlingly low returns on both out-of-the-money put and out-of-the-money call options as well as the high observed variance premium. In a dynamic setting, probability weighting and time-varying equity return volatility combine to match the observed time-series pattern of the variance premium.