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Prices of State-Contingent Claims Implicit in Option Prices
TLDR
In this article, the authors derive the prices of primitive securities from call options on aggregate consumption, and derive an equilibrium valuation of assets with uncertain payoffs at many future dates by using the Black-Scholes equation.Abstract:
This paper implements the time-state preference model in a multi-period economy, deriving the prices of primitive securities from the prices of call options on aggregate consumption. These prices permit an equilibrium valuation of assets with uncertain payoffs at many future dates. Furthermore, for any given portfolio, the price of a $1.00 claim received at a future date, if the portfolio's value is between two given levels at that time, is derived explicitly from a second partial derivative of its call-option pricing function. An intertemporal capital asset pricing model is derived for payoffs that are jointly lognormally distributed with aggregate consumption. It is shown that using the Black-Scholes equation for options on aggregate consumption implies that individuals' preferences aggregate to isoelastic utility.read more
Citations
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An intertemporal asset pricing model with stochastic consumption and investment opportunities
TL;DR: In this paper, the authors derived a single-beta asset pricing model in a multi-good, continuous-time model with uncertain consumption-goods prices and uncertain investment opportunities.
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Implied Binomial Trees
TL;DR: In this article, a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options is developed. But this method requires the assumption that the underlying asset has a limited risk-free lognormal distribution.
Book
Theory of Financial Decision Making
TL;DR: In this article, the authors provide access to a broad area of research that is not available in separate articles or books of readings, such as the meaning and measurement of risk, general single-period portfolio problems, mean-variance analysis and the Capital Asset Pricing Model, the Arbitrage Pricing Theory, complete markets, multi period portfolio problems and the Intertemporal Capital Asset pricing model, the Black-Scholes option pricing model and contingent claims analysis, 'risk-neutral' pricing with Martingales, Modigliani-Miller and the capital structure of the firm, interest
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Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns
TL;DR: In this paper, the authors studied the time-series behavior of asset returns and aggregate consumption in a representative consumer model and imposing restrictions on preferences and the joint distribution of consumption and returns.
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Risks and Portfolio Decisions Involving Hedge Funds
Vikas Agarwal,Narayan Y. Naik +1 more
TL;DR: In this article, the authors used a mean-conditional value-at-risk framework to evaluate the risk of hedge funds using buy-and-hold and option-based strategies and found that a large number of hedge fund strategies exhibit payoffs similar to a short position in a put option on the market index.
References
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Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Journal ArticleDOI
Capital asset prices: a theory of market equilibrium under conditions of risk*
TL;DR: In this paper, the authors present a body of positive microeconomic theory dealing with conditions of risk, which can be used to predict the behavior of capital marcets under certain conditions.
Book ChapterDOI
The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets
TL;DR: In this article, the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish is discussed.
Book
Theory of rational option pricing
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.
Journal ArticleDOI
An intertemporal capital asset pricing model
TL;DR: In this article, an intertemporal model for the capital market is deduced from portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time.