Investor Risk Aversion and Market Shocks: Event Studies using Options on Crude Oil
54 Pages Posted: 8 Aug 2012 Last revised: 4 Jul 2013
Date Written: July 6, 2012
Abstract
The effect of four distinct market events on investor risk aversion is evaluated using options data on the WTI crude oil futures contract during the 2007-2011 period. The risk aversion function and the stochastic discount factor (SDF) are estimated using parametric approaches before and after each event in a fifteen-day event window. Events of a more persistent, regime change type lead to flatter risk aversion functions (i.e., less decreasing in wealth) and SDFs. In contrast, events of a transitory nature lead to steeper risk aversion functions (i.e., decreasing more rapidly in wealth) and SDFs. Practical implications are drawn.
Keywords: risk aversion, pricing kernel, event study, generalised beta, option-implied density
JEL Classification: G13, G14
Suggested Citation: Suggested Citation
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