Pricing of Index Options in Incomplete Markets

We characterize a set of risk-neutral measures associated with a comprehensive class of risk averse investors. From this set, we show how to construct option price bounds and recover the implied gamma: a parameter uniquely identifying the marginal investor pricing a given option. Empirically, we find that S&P 500 option prices are reconciled by heterogeneous marginal investors who differ in their assessment of tail risk. This heterogeneity is time-varying, decreases during financial crises, and provides novel insights into the skew patterns of index options. The recovered investors' preferences related to compensation for downside risk help predict future market returns

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Year of publication:	[2021]
Authors:	Almeida, Caio ; Freire, Gustavo
Publisher:	[S.l.] : SSRN
Subject:	Unvollkommener Markt \| Incomplete market \| Index-Futures \| Index futures \| Optionspreistheorie \| Option pricing theory

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