Risk aversion functions extracted from observed stock and option prices can be negative, as shown by Aït-Sahalia and Lo (2000), Journal of Econometrics 94: 9--51; and Jackwerth (2000), The Review of Financial Studies 13(2), 433--51. We rationalize this puzzle by a lack of conditioning on latent...

Risk aversion functions extracted from observed stock and option prices can be negative, as shown by Aiuml;t-Sahalia and Lo (2000), Journal of Econometrics 94: 9-51; and Jackwerth (2000), The Review of Financial Studies 13(2), 433-51. We rationalize this puzzle by a lack of conditioning on latent...

This paper uses an asymptotically valid expansion to derive explicitly agent's individual demand schedules and then the equilibrium allocations in options. Agents derive financial and non-tradeable income over time; they can only partially offset the latter using bonds and stocks and the option...

This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to...