Risk aversion in financial crises
Autor(a) principal: | |
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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/10400.14/15391 |
Resumo: | This study is designed to understand how investors risk preferences change, when faced by financial crisis. Option prices implied densities provide information about market movements and risk preferences. The data used are European call options prices on the DJIA with a time to maturity of four weeks. This paper obtains the risk aversion estimates by the extraction of options implied risk neutral densities and their translation to real world densities, applied to three crisis : Dotcom bubble in 2001; Subprime mortgage in 2008 and European sovereign debt in 2011. RND is achieved by the use of two parametric methods: mixture of lognormal densities (MLN); and generalised beta distribution of the second kind (GB2). The risk transformation procedure from RND to RWD (real world densities) is achieved by applying the power utility function. The RND empirical results imply that the GB2 method is disregarded due to inferior quality whilst the MLN produces results of higher uncertainty and expected future results of index levels corrected downward. The risk aversion estimates obtained from the RWD generation process do not present any evident pattern of evolution from a stable financial period to one of financial shock. It is also important to mention that for some periods the risk aversion reached negative values. This is a surprising result due to existent theoretical assumption of positive risk aversion. Overall, this study documents inconclusive results. Nevertheless, several important topics are left for future research. Interesting developments would consist: either replicating this study considering more expiration dates, bearing in mind that too many periods would imply an extremely generalised risk aversion estimate that would be counterproductive for achieving the objective of this paper; apply another method from the available literature; or testing the negative estimates with more sophisticated models that are beyond the focus of this paper. |
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Risk aversion in financial crisesRisk neutral distributionReal world densityMixture of lognormalGeneralised beta of the second kindPower utility functionDomínio/Área Científica::Ciências Sociais::Economia e GestãoThis study is designed to understand how investors risk preferences change, when faced by financial crisis. Option prices implied densities provide information about market movements and risk preferences. The data used are European call options prices on the DJIA with a time to maturity of four weeks. This paper obtains the risk aversion estimates by the extraction of options implied risk neutral densities and their translation to real world densities, applied to three crisis : Dotcom bubble in 2001; Subprime mortgage in 2008 and European sovereign debt in 2011. RND is achieved by the use of two parametric methods: mixture of lognormal densities (MLN); and generalised beta distribution of the second kind (GB2). The risk transformation procedure from RND to RWD (real world densities) is achieved by applying the power utility function. The RND empirical results imply that the GB2 method is disregarded due to inferior quality whilst the MLN produces results of higher uncertainty and expected future results of index levels corrected downward. The risk aversion estimates obtained from the RWD generation process do not present any evident pattern of evolution from a stable financial period to one of financial shock. It is also important to mention that for some periods the risk aversion reached negative values. This is a surprising result due to existent theoretical assumption of positive risk aversion. Overall, this study documents inconclusive results. Nevertheless, several important topics are left for future research. Interesting developments would consist: either replicating this study considering more expiration dates, bearing in mind that too many periods would imply an extremely generalised risk aversion estimate that would be counterproductive for achieving the objective of this paper; apply another method from the available literature; or testing the negative estimates with more sophisticated models that are beyond the focus of this paper.Kokkonen, JoniVeritati - Repositório Institucional da Universidade Católica PortuguesaCunha, Gonçalo Silva Ramos da Silva2014-10-29T15:25:07Z2013-06-2720132013-06-27T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/masterThesisapplication/pdfhttp://hdl.handle.net/10400.14/15391TID:201092549enginfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-10-17T01:34:54Zoai:repositorio.ucp.pt:10400.14/15391Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T18:12:50.236404Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Risk aversion in financial crises |
title |
Risk aversion in financial crises |
spellingShingle |
Risk aversion in financial crises Cunha, Gonçalo Silva Ramos da Silva Risk neutral distribution Real world density Mixture of lognormal Generalised beta of the second kind Power utility function Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
title_short |
Risk aversion in financial crises |
title_full |
Risk aversion in financial crises |
title_fullStr |
Risk aversion in financial crises |
title_full_unstemmed |
Risk aversion in financial crises |
title_sort |
Risk aversion in financial crises |
author |
Cunha, Gonçalo Silva Ramos da Silva |
author_facet |
Cunha, Gonçalo Silva Ramos da Silva |
author_role |
author |
dc.contributor.none.fl_str_mv |
Kokkonen, Joni Veritati - Repositório Institucional da Universidade Católica Portuguesa |
dc.contributor.author.fl_str_mv |
Cunha, Gonçalo Silva Ramos da Silva |
dc.subject.por.fl_str_mv |
Risk neutral distribution Real world density Mixture of lognormal Generalised beta of the second kind Power utility function Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
topic |
Risk neutral distribution Real world density Mixture of lognormal Generalised beta of the second kind Power utility function Domínio/Área Científica::Ciências Sociais::Economia e Gestão |
description |
This study is designed to understand how investors risk preferences change, when faced by financial crisis. Option prices implied densities provide information about market movements and risk preferences. The data used are European call options prices on the DJIA with a time to maturity of four weeks. This paper obtains the risk aversion estimates by the extraction of options implied risk neutral densities and their translation to real world densities, applied to three crisis : Dotcom bubble in 2001; Subprime mortgage in 2008 and European sovereign debt in 2011. RND is achieved by the use of two parametric methods: mixture of lognormal densities (MLN); and generalised beta distribution of the second kind (GB2). The risk transformation procedure from RND to RWD (real world densities) is achieved by applying the power utility function. The RND empirical results imply that the GB2 method is disregarded due to inferior quality whilst the MLN produces results of higher uncertainty and expected future results of index levels corrected downward. The risk aversion estimates obtained from the RWD generation process do not present any evident pattern of evolution from a stable financial period to one of financial shock. It is also important to mention that for some periods the risk aversion reached negative values. This is a surprising result due to existent theoretical assumption of positive risk aversion. Overall, this study documents inconclusive results. Nevertheless, several important topics are left for future research. Interesting developments would consist: either replicating this study considering more expiration dates, bearing in mind that too many periods would imply an extremely generalised risk aversion estimate that would be counterproductive for achieving the objective of this paper; apply another method from the available literature; or testing the negative estimates with more sophisticated models that are beyond the focus of this paper. |
publishDate |
2013 |
dc.date.none.fl_str_mv |
2013-06-27 2013 2013-06-27T00:00:00Z 2014-10-29T15:25:07Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/masterThesis |
format |
masterThesis |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10400.14/15391 TID:201092549 |
url |
http://hdl.handle.net/10400.14/15391 |
identifier_str_mv |
TID:201092549 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
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info:eu-repo/semantics/openAccess |
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openAccess |
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application/pdf |
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reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
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RCAAP |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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1799131805407772672 |