September 2000 UPDATED VERSION
Joshua Rosenberg
ABSTRACT
This paper examines the relationship between consumption-based and option-based risk-neutral moments, providing
a technique to explore consumption-based pricing kernel specifications using data from the options markets. Estimators
for average risk-neutral moments of each type are proposed and implemented.
Option-based average risk-neutral moments are estimated for S&P500 returns using S&P500 futures options data; consumption-based moments are estimated using aggregate consumption data, the time-series of S&P500 returns, and pricing kernels characterized by constant relative risk aversion, consumption durability, and habit persistence. Moment comparisons indicate that there is a "risk-neutral standard deviation puzzle." All of the pricing kernel specifications, even at very high levels of relative risk aversion, significantly underestimate option-based risk-neutral standard deviation or interquartile range.
Subject: Investments/Derivatives, Investments/Volatility of Asset Prices, Investments/Econometrics
Rosenberg: (212) 998-0311 jrosenb0@stern.nyu.edu
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