A comparison of risk aversion between markets

• Autor(a) principal: Tavares, José Pedro Moura
• Data de Publicação: 2013
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/15519
• topic: Lognormal mixture; Generalised beta; Hermite polynomials; Risk neutral densities; Risk transformations; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

In this study we perform a comparison between the Dow Jones Industrial Average and the FTSE 100 indexes concerning their estimated risk aversions. Risk neutral densities are calculated for both indexes using a polynomial-lognormal, a GB2 and a mixture of two lognormal distributions; we show that the best fit to observed data is obtained using the latter. For the method of best fit, and assuming a power utility function, the risk aversion of investors is calculated using a maximum likelihood method and a likelihood ratio. The FTSE 100 presents the highest value of risk aversion of the two indexes, as well as the lowest volatility. A negative correlation is found between risk aversion estimates and the volatility of the underlying index.