Variations in Risk Aversion

In this paper recent techniques for recovering information implied by options market prices and realized returns are applied empirically to measure the risk aversion of investors in the Israeli stock market. We determine nonparametric volatility smile, densities and risk aversion functions from a ten years sample of daily option and stock market prices. Moreover, we construct a time series of the absolute risk aversion, and study its variation over time. We report decreasing and generally positive risk aversion function, which varies substantially over time and is negatively correlated with the ATM implied volatility.

Autorentext

Moshe Omer, 35, is an investment professional, specializes in derivatives trading and hedging. For several years he is managing IR derivatives portfolios, including US RMBS book, where there are no close-end formulae for pricing or hedging the embedded exotic IR optionality. Omer holds M.Sc. Finance from Tel Aviv University.