Revealed Risk Aversion Appraisal Using Derivatives Premium in the US Equity Market

Student: Shapkin Ignat

Supervisor: Vladimir R. Evstigneev

Faculty: Faculty of World Economy and International Affairs

Educational Programme: World Economy (Bachelor)

Year of Graduation: 2017

Risk aversion stands for the main criterion of the decision-making process under the risk in the financial market. It shapes the relationship between the subjective and risk-neutral expectations of the investors. This paper aims at derivation of the absolute risk-aversion function in accordance to Jackwerth formalism by extraction risk-neutral density from S&P 500 options prices and solving the Fokker-Planck differential equation for the probability density of respective index returns. We applied several approaches to risk-neutral density derivation and deduced the general solution of PDF. These results will be of importance to option pricing theory.

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