University of Twente Student Theses


Empirical study on the existence of Tuned Risk Aversion in option pricing

Klein Teeselink, J (2017) Empirical study on the existence of Tuned Risk Aversion in option pricing.

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Abstract:We combine Tuned Risk Aversion and Conic Finance into a discrete-time option pricing model. The model values bid and ask prices by distorted expectations with non-static risk aversion under a weaker form of consistency. With static risk aversion imposed by strong dynamic consistency, spreads will explode due to the unnecessary build-up of conservatism. With Tuned Risk Aversion we introduce an alternative that is able to produce prices that re ect market quotations while remaining consistent. We show that we are able to capture the complete probability adjustment of implied volatility by distortion, which we believe to be more intuitive. The bridging of Tuned Risk Aversion with Conic Finance provides a very promising outlook into finding a realistic uniform framework for pricing derivatives.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
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