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General Equilibrium Option Pricing Method: Theoretical and Empirical Study

  • Book
  • © 2018

Overview

Authors:
  1. Jian Chen

    1. Department of Finance, School of Economics, Xiamen University, Xiamen, China

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  • Applies the general equilibrium approach in explaining the puzzle

  • Proposes variance risk premium and empirically tests its predictive power for international stock market returns

  • Elaborates the international stock market

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Table of contents (11 chapters)

  1. Front Matter

    Pages i-xi
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  2. Introduction and Model

    1. Front Matter

      Pages 1-1
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    2. Introduction

      • Jian Chen
      Pages 3-7

    3. General Equilibrium Option Pricing Models

      • Jian Chen
      Pages 9-19

  3. Comparison Between Models

    1. Front Matter

      Pages 21-21
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    2. Simulation Comparison

      • Jian Chen
      Pages 23-34

    3. Empirical Comparison

      • Jian Chen
      Pages 35-50

  4. Jump Risk Premium

    1. Front Matter

      Pages 51-51
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    2. Fanning Out Preference and Option Pricing

      • Jian Chen
      Pages 53-67

    3. Jump Size Distributions and Option Pricing

      • Jian Chen
      Pages 69-79

  5. Variance Risk Premium

    1. Front Matter

      Pages 81-81
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    2. Risk Aversion Estimated from Volatility Spread

      • Jian Chen
      Pages 83-94

    3. Predictability of VRP: Hongkong Evidence

      • Jian Chen
      Pages 95-107

    4. Predictability of VRP: Other International Evidence

      • Jian Chen
      Pages 109-122

    5. Predictability of VRP: A Comparison Study

      • Jian Chen
      Pages 123-141

    6. Conclusions

      • Jian Chen
      Pages 143-146

  6. Back Matter

    Pages 147-164
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Keywords

About this book

This book mainly addresses the general equilibrium asset pricing method in two aspects: option pricing and variance risk premium. First, volatility smile and smirk is the famous puzzle in option pricing. Different from no arbitrage method, this book applies the general equilibrium approach in explaining the puzzle. In the presence of jump, investors impose more weights on the jump risk than the volatility risk, and as a result, investors require more jump risk premium which generates a pronounced volatility smirk. Second, based on the general equilibrium framework, this book proposes variance risk premium and empirically tests its predictive power for international stock market returns.


Authors and Affiliations

  • Department of Finance, School of Economics, Xiamen University, Xiamen, China

    Jian Chen

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