Option-Implied Risk Aversion Estimates
Robert R. Bliss, Nikolaos Panigirtzoglou
Using a utility function to adjust the risk-neutral PDF embedded in crosssections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential utility functions, we estimate the representative agent’s relative risk aversion at different horizons. The estimated coefficients of relative risk aversion are all reasonable. The relative risk aversion estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of relative risk aversion declines broadly with the forecast horizon and is lower during periods of high market volatility.
