Topic: Risk Adjustmentthe Temporal Resolution of Uncertainty: Evidence from Options Markets

Speaker: Ivan Shaliastovich, Wharton School, University of Pennsylvania

Date: June 13, 2013 (Thu.)

Time: 1:00-2:30pm

Location: Building 4, Room 101

Language: English

Abstract:

Risk-neutral probabilities, observable from options data, contain information on physical probabilitiesrisk adjustments. Under further assumptions on the preference structure, such as state-independent expected utility, physical probabilitiesrisk adjustments can be separately recovered from risk-neutral probabilities alone. We extend the market-based recovery approach to the recursive utility structure, which allows for a preference for the timing of the resolution of uncertainty. We implement a market-based recovery using S&P 500 optionsfind that the data strongly supports a specification of early resolution of uncertainty. Failure to account for the magnitude of the preference for early resolution of uncertainty can significantly overstate the implied probability of bad events, understate risk adjustments,as a consequence under-estimate average market returns.

About the speaker:

Ivan Shaliastovich is an Assistant Professor of Finance at the Wharton School in the University of Pennsylvania. He obtained his Ph.D. in Economics from the Fuqua School of Business at Duke University in 2009. His research interests focus on the asset pricingfinancial econometrics. Prof. Shaliastovich has published in the Review of Financial Studies, American Economic Review, Mathematical Financeother journals.