Probability weighting functions implied in options prices

• 成果类型: Article
• 署名作者: Polkovnichenko, Valery; Zhao, Feng
• 署名单位: Federal Reserve System - USA; Federal Reserve System Board of Governors; University of Texas System; University of Texas Dallas
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2012.09.008
• 发表日期: 2013
• 页码: 580-609
• 关键词: pricing kernel; Nonparametric Estimation; probability weighting; rank-dependent utility

摘要

The empirical pricing kernels estimated from index options are non-monotone (Rosenberg and Engle, 2002; Bakshi, Madan, and Panayotov, 2010) and the corresponding risk-aversion functions can be negative (Nit-Sahalia and Lo, 2000; Jackwerth, 2000). We show theoretically that these and several other properties of empirical pricing kernels are consistent with rank-dependent utility model with probability weighting function, which overweights tail events. We also estimate the pricing kernels nonparametrically from the Standard & Poor's 500 index options and construct empirical probability weighting functions. The estimated probability weights typically have the inverse-S shape, which overweights tail events and is widely supported by the experimental decision theory. (C) 2012 Elsevier B.V. All rights reserved.