An Equilibrium Model of Rare-Event Premia and Its Implication for Option Smirks

By Jun Liu, Jun Pan, Tan Wang. 2005

372 citations recorded by the source corpus.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8314fd0c44a8efd978d904ffe5952154dee853b9

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Citations in the corpus

The impact of risk and uncertainty on expected returns. (2009, background): “…Hansen, and Sargent (2003), Hansen, Sargent, Turmuhambetova, and Williams (2006), Chen and Epstein (2002), Maenhout (2004, 2006), Uppal and Wang (2003), Kogan and Wang (2002), and Liu, Pan, and Wang (2005), among many others, have shown how uncertainty affects optimal decisions and asset prices.”
Stochastic Dominance Bounds on American Option Prices in Markets with Frictions (2007, background): “parameters chosen for the jump component are within the range of values in the various scenarios presented by Liu et al. (2005) as representative of the S&P 500 jumps: annual arrival frequency 1/5, expected log amplitude −1%, and log amplitude volatility 7%. Unlike the lognormal process, this proc”
The Information Content of Implied Volatilities and Model-Free Volatility Expectations: Evidence from Options Written on Individual Stocks (2010, positive): “We use the implied volatilities provided by IvyDB Database directly in our study, as do Carr and Wu (2004) and Xing, Zhang and Zhao (2007) who choose the same database.”
The Time Variation in Risk Appetite and Uncertainty (2019, neutral): “Martin (2017) uses option-implied variances to provide bounds on equity premiums, and several articles (Liu et al. 2004, Santa-Clara and Yan 2010, Bollerslev and Todorov 2011) suggest that compensation for rare events ( “ jumps ” ) accounts for a large fraction of equity risk premiums.”
An Empirical Portfolio Perspective on Option Pricing Anomalies (2007, background): “15 Liu et al. (2005) study the equilibrium option pricing implications of robustness for investors that are averse to model uncertainty concerning rare events.”
Model Specification and Risk Premia: Evidence from Futures Options (2007, background): “Liu, Pan, and Wang (2005) argue that an aversion to parameter uncertainty could generate the premia.”