Risk Aversion, Fanning Preference, and Volatility Smirk on S&P500 Index Options

This paper proposes a novel way of pricing S&P500 index options in the presence of jump risk. Our analysis is built upon an equilibrium option pricing rule for a representative agent economy. In particular, we use the weighted utility's certainty equivalent to specify agent's risk preference, which displays a fanning out characteristic. We find that the fanning effect captures a remarkably large portion of the total market risk premium implicit in options. As a result, the model with fanning effect generates pronounced volatility smirks

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Year of publication:	2016
Authors:	Chen, Jian
Other Persons:	Ma, Chenghu (contributor)
Publisher:	[2016]: [S.l.] : SSRN
Subject:	Volatilität \| Volatility \| Risikoaversion \| Risk aversion \| Index-Futures \| Index futures \| Optionspreistheorie \| Option pricing theory \| Risiko \| Risk