Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments September 1997 erstellt
Description:
This paper develops a method for option hedging which is consistent with time-varying preferences and probabilities. The preferences are expressed in the form of an empirical pricing kernel (EPK), which measures the state price per unit probability, while probabilities are derived from an estimated stochastic volatility model of the form GARCH components with leverage. State prices are estimated using the flexible risk-neutral density method of Rosenberg (1995) and a daily cross-section of option premia. Time-varying preferences over states are linked to a dynamic model of the underlying price to obtain a one-day ahead forecast of derivative price distributions and minimum variance hedge ratios.Empirical results suggest that risk aversion over Samp;P500 return states is substantially higher than risk aversion implied by Black-Scholes state prices and probabilities using long run estimates of Samp;P500 return moments. It is also found that the daily level of risk aversion is strongly positively autocorrelated, negatively correlated with Samp;P500 price changes, and positively correlated with the spread between implied and objective volatilities.Hedging results reveal that typical hedging techniques for out-of-the-money Samp;P500 index options, such Black-Scholes or historical minimum variance hedging, are inferior to the EPK hedging method. Thus, time-varying preferences and probabilities appear to be an important factor in the day-to-day pricing of Samp;P500 options