In this study we perform a comparison between the Dow Jones Industrial Average and the FTSE 100 indexes concerning their estimated risk aversions. Risk neutral densities are calculated for both indexes using a polynomial-lognormal, a GB2 and a mixture of two lognormal distributions; we show that the best fit to observed data is obtained using the latter. For the method of best fit, and assuming a power utility function, the risk aversion of investors is calculated using a maximum likelihood method and a likelihood ratio. The FTSE 100 presents the highest value of risk aversion of the two indexes, as well as the lowest volatility. A negative correlation is found between risk aversion estimates and the volatility of the underlying index.
| Date of Award | 2013 |
|---|
| Original language | English |
|---|
| Awarding Institution | - Universidade Católica Portuguesa
|
|---|
| Supervisor | Joni Kokkonen (Supervisor) |
|---|
- Lognormal mixture
- Generalised beta
- Hermite polynomials
- Risk neutral densities
- Risk transformations
A comparison of risk aversion between markets
Tavares, J. P. M. (Student). 2013
Student thesis: Master's Thesis