A Robust Equilibrium Relationship between Market Prices of Risks and Risk Aversion in Dynamically Complete Stochastic
Qian Han, Calum G. Turvey
#002038 20131014 (published) Views:228
We derive a general equilibrium linear relationship between the market prices of risks and market risk aversion under a continuous time stochastic volatility model completed by liquidly traded options. The relation is robust as it is valid for both endowment and production economies, and for both regular time-separable von-Neumann Morgenstern and non-time-separable habit formation preferences. The relation can be used in practice to construct a daily market risk aversion index from options market.
JEL-Codes: C61, D51, G11, G13
Keywords: General equilibrium, market price of risk, market risk aversion, market pricing kernel, habit formation, stochastic volatility model