Estimating Probability Weighting Functions through Option Pricing Bounds

IF 2.2 Q2 BUSINESS, FINANCE

Review of Asset Pricing Studies Pub Date : 2024-04-26 DOI:10.1093/rapstu/raae008

Tzu-Ying Chen, Yo-Lan Lin, Larry Y Tzeng

引用次数: 0

Abstract

This paper proposes a novel approach to estimating the probability weighting function (PWF) of investors in the option market. We match observed option prices to the option pricing bounds under stochastic dominance rules. Using 1-month S&P 500 index option data, we find that investors could subjectively employ an inverse S-shaped probability weighting function, which increases the weights on extreme returns and asymmetrically assigns greater weights to extremely low returns than to extremely high returns. Our findings suggest that the inverse S-shaped nature of the PWFs is robust across various estimation specifications, such as adopting an alternative methodology to construct the return distribution, and employing option data with different times to maturity. (JEL G12)

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通过期权定价界限估算概率加权函数

本文提出了一种估算期权市场投资者概率加权函数（PWF）的新方法。我们将观察到的期权价格与随机支配规则下的期权定价边界相匹配。通过使用 1 个月的 S&P 500 指数期权数据，我们发现投资者可以主观地使用反 S 型概率加权函数，该函数增加了极端收益的权重，并不对称地赋予极低收益比极高收益更大的权重。我们的研究结果表明，逆 S 型概率加权函数的性质在不同的估计规格下都是稳健的，例如采用另一种方法来构建回报率分布，以及采用不同到期时间的期权数据。(JEL G12)

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

Review of Asset Pricing Studies BUSINESS, FINANCE-

CiteScore

19.80

自引率

0.80%

发文量

期刊介绍： The Review of Asset Pricing Studies (RAPS) is a journal that aims to publish high-quality research in asset pricing. It evaluates papers based on their original contribution to the understanding of asset pricing. The topics covered in RAPS include theoretical and empirical models of asset prices and returns, empirical methodology, macro-finance, financial institutions and asset prices, information and liquidity in asset markets, behavioral investment studies, asset market structure and microstructure, risk analysis, hedge funds, mutual funds, alternative investments, and other related topics. Manuscripts submitted to RAPS must be exclusive to the journal and should not have been previously published. Starting in 2020, RAPS will publish three issues per year, owing to an increasing number of high-quality submissions. The journal is indexed in EconLit, Emerging Sources Citation IndexTM, RePEc (Research Papers in Economics), and Scopus.