Rare Events and Investor Risk Aversion: Evidence from Crude Oil Options
Laval University - Faculté d'Administration
Gabriel J. Power
Laval University - Département de Finance et Assurance
July 6, 2012
The effect of four distinct events on investor risk aversion is evaluated using options data on the WTI crude oil futures contract during the 2007-2011 period. Absolute risk aversion functions and pricing kernels are estimated for eight fifteen-trading day windows -- before and after each event. Risk-neutral densities are parameterised under two cases: normal and Generalised Beta 2 distributional assumptions for returns. Results show that investor risk aversion functions, but not pricing kernels, are significantly and differentially affected by the events. The effect on risk aversion depends on the nature of the shock. Anticipated events affect the real-world density more than the risk-neutral density, leading to flatter risk aversion functions (i.e., less decreasing in wealth). In contrast, unanticipated events affect the risk-neutral density more than the real-world density, leading to steeper risk aversion functions (i.e., decreasing more rapidly in wealth).
Number of Pages in PDF File: 56
Keywords: risk aversion, pricing kernel, event study, generalised beta, option-implied density
JEL Classification: G13, G14working papers series
Date posted: August 8, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.734 seconds