Template-Type: ReDIF-Paper 1.0
Author-Name:  Satadru Hore
Author-Name-First: Satadru
Author-Name-Last: Hore
Author-Name:  Hedibert Lopes
Author-Name-First: Hedibert
Author-Name-Last: Lopes
Author-Name:  Robert McCulloch
Author-Name-First: Robert
Author-Name-Last: McCulloch
Title: General Equilibrium Option Pricing under Counter-Cyclical Growth and Long-Run Risk
Abstract:  Put option prices are counter-cyclical. We build a general equilibrium model based on Duffie-Epstein preferences and Ak production function that delivers a model of put option prices that captures both time-series and cross-sectional properties of relative put option prices. When estimated with US aggregate consumption data and S&P 500 index options using Bayesian MCMC, we confirm our theory that agents have elasticity of intertemporal substitution greater than 1 which confirms the substitution effect, and put option prices reveal the underlying counter-cyclical economic state. The underlying economic dynamics, when combined with long-run risk nature of Duffie-Epstein preferences, can match the time-series and cross-section of US option prices with our theory.
Length:  58 pages
Creation-Date:  2016
Order-URL: https://repositorio.insper.edu.br/handle/11224/5893
File-URL: https://repositorio.insper.edu.br/handle/11224/5893
File-Format: text/html
File-Function: Full text
Number: 230
Handle: RePEc:aap:wpaper:230