Skip Navigation


RFS Advance Access originally published online on July 6, 2006
Review of Financial Studies 2007 20(3):859-904; doi:10.1093/rfs/hhl023
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
20/3/859    most recent
hhl023v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Similar articles in ISI Web of Science
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrow Search for citing articles in:
ISI Web of Science (1)
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Ziegler, A.
Right arrow Search for Related Content
Related Collections
Right arrow D81 - Criteria for Decision-Making under Risk and Uncertainty
Right arrow G12 - Asset Pricing; Trading volume; Bond Interest Rates
Right arrow G13 - Contingent Pricing; Futures Pricing
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Why Does Implied Risk Aversion Smile?

Alexandre Ziegler
Swiss Finance Institute, University of Lausanne

Address correspondence to Swiss Finance Institute, University of Lausanne, Extranef Building, 1015 Lausanne, Switzerland, or e-mail: alexandre.ziegler{at}unil.ch

Implied risk aversion estimates reported in the literature are strongly U-shaped. This article explores different potential explanations for these "smile" patterns: (i) preference aggregation, both with and without stochastic volatility and jumps in returns, (ii) misestimation of investors’ beliefs caused by stochastic volatility, jumps, or a Peso problem, and (iii) heterogeneous beliefs. The results reveal that preference aggregation and misestimation of investors’ beliefs caused by stochastic volatility and jumps are unlikely to be the explanation for the smile. Although a Peso problem can account for the smile, the required probability of a market crash is unrealistically large. Heterogeneous beliefs cause sizable distortions in implied risk aversion, but the degree of heterogeneity required to explain the smile is implausibly large. (JEL: G12, G13)


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 REV FINANC STUDHome page
T. Bollerslev, G. Tauchen, and H. Zhou
Expected Stock Returns and Variance Risk Premia
Rev. Financ. Stud., November 1, 2009; 22(11): 4463 - 4492.
[Abstract] [Full Text] [PDF]


Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.