Extracting risk aversion estimates from option prices/implied volatility
Master Thesis
2010
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University of Cape Town
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The risk neutral density function is the distribution implied by the market price of derivative securities, namely options. It encloses the assumption that arbi-trage free conditions persist in the market. Given the historical evolution of stock prices, an investor will form some belief about the future progression of the stock price.
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Reference:
Pillay, A. 2010. Extracting risk aversion estimates from option prices/implied volatility. University of Cape Town.