Infering Forward Looking Financial Market Risk Premia From Derivatives Prices
- Topics:
- Investment and Capital Markets
- Tags:
- Arbitrage,
- Derivatives,
- Finance,
- Financial,
- Financial Accounting,
- Financial Market,
- Financial Services,
- Premium,
- University Of Technology Sydney
- Source:
- University of Technology Sydney
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Overview: This paper focuses on a topical and important area of theory and practice i.e. the risk premium in financial markets. While there exist a vast amount of research into its behavior, particularly in US markets, this is largely based on regression based techniques which do not capture well the dynamic of the risk premium. In this paper the variation of the unobserved risk premium is modeled by a system of stochastic differential equations connected by arbitrage arguments between the spot equity market, the index futures and options on index futures. Although various processes for the dynamic of the risk premium may be considered, the paper motivates and analyses a mean-reverting form.
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Format: PDF | Size: 84KB | Date: Apr 2000 | Pages: 14
