Risk Aversion, Intertemporal Substitution, and Option Pricing.

This paper develops a general stochastic framework and an equilibrium asset pricing model theat make clear how attitudes towards intertemporal substitution and risk matter for option pricing; In particular we show under which statistical conditions option princing formulas are not preference-free, in other words when preferences are not hidden in the stock and bond prices as they are in the standard Black and Scholes (BS) or Hull and White (HW) pricing formulas.