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Extracting market information from equity options with exponential Lévy processes

Fabozzi, Frank J., Leccadito, Arturo, Tunaru, Radu (2014) Extracting market information from equity options with exponential Lévy processes. Journal of Economic Dynamics and Control, 38 (1). pp. 125-141. ISSN 0165-1889. (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)

Abstract

Lévy processes have been successfully applied in the modeling of financial assets. Useful information such as implied volatility, skewness, and risk-preferences can be derived from market option prices. In this paper, we advocate using Esscher conjugate Lévy processes to estimate risk-neutral and empirical densities. More specifically, we employ the exponential Meixner and NIG processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010. Our empirical analysis using S&P 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis (August 2007) and the crisis of confidence that followed, anticipating the downfall in equity markets in 2008, but then returning to normal levels in 2009.

Item Type: Article
Uncontrolled keywords: Risk-neutral density; Exponential Lévy processes; Pricing kernel; Relative risk-aversion coefficient
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Radu Tunaru
Date Deposited: 28 May 2014 15:05 UTC
Last Modified: 29 May 2019 12:37 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/41199 (The current URI for this page, for reference purposes)
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