Option-Implied Risk Aversion Estimates


  • Robert R. Bliss,

  • Nikolaos Panigirtzoglou

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    • Bliss is with the Federal Reserve Bank of Chicago and Panigirtzoglou is with the Bank of England. We are particularly grateful for helpful discussions with Lars Hansen; for comments by Jeremy Berkowitz; Avi Bick; Peter Christopherson; Lars Hansen; George Kapetanios; Jesper Lindé; David Marshall; Marti Subrahmanyam; and seminar participants at the Bank of England; the Federal Reserve Bank of Chicago; Indianapolis University–Purdue University, Indianapolis; McGill University; the Sveriges Riksbank; the University of Georgia; DePaul University; the 2002 Derivatives Securities Conference; 2002 Bachelier Finance Society Congress; the 2002 European Financial Management Association Annual Meeting; the 2002 European Finance Association Annual Meeting; and the Warwick Business School, Financial Options Research Center 2002 conference on Options: Recent Advances; for the guidance and suggestions of the editor Richard Green; and the referee. We thank Darrin Halcomb for his excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Chicago or the Bank of England. This paper was previously titled “Recovering Risk Aversion from Options.” Any remaining errors are our own.


Using a utility function to adjust the risk-neutral PDF embedded in cross sections 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 (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.