Investor Risk Aversion and Market Shocks: Event Studies using Options on Crude Oil

54 Pages Posted: 8 Aug 2012 Last revised: 4 Jul 2013

See all articles by Marie-Hélène Gagnon

Marie-Hélène Gagnon

Université Laval - Faculté d'Administration

Gabriel Power

Université Laval - Département de Finance et Assurance

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

Gagnon, Marie-Hélène and Power, Gabriel, Investor Risk Aversion and Market Shocks: Event Studies using Options on Crude Oil (July 6, 2012). Available at SSRN: https://ssrn.com/abstract=2126343 or http://dx.doi.org/10.2139/ssrn.2126343

Marie-Hélène Gagnon (Contact Author)

Université Laval - Faculté d'Administration ( email )

Quebec G1K 7P4
Canada

Gabriel Power

Université Laval - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

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