Lévy processes have been successfully applied in the modeling of financial assets. Useful information such as implied volatility, skewness, and riskpreferences 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.

Extracting Market Information from Equity Options with Exponential Lévy Processes

LECCADITO, ARTURO;
2014

Abstract

Lévy processes have been successfully applied in the modeling of financial assets. Useful information such as implied volatility, skewness, and riskpreferences 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.
Risk-neutral density; Exponential Lévy processes; Pricing kernel
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/20.500.11770/131649
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