Riders on the storm

: a risk preference profiling on investors who rode the subprime financial

Abstract

This dissertation estimates risk-neutral densities from 3-week contracts on the S&P 500 index in an attempt to characterize the underlying index in a risk-neutral environment through the statistics derived from the implied distributions for two samples: pre-subprime-crisis and crisis. The distributions are estimated using mixture of lognormal densities, generalized beta distribution of the second kind and lognormal-polynomials. The mean values are similar in the three methods employed, along with the standard deviation. Moreover, the distributions tend to be negatively skewed and leptokurtic for both samples. The constant relative risk aversion coefficient is estimated for both samples assuming the power utility is well representative of investors’ behavior. The method employed was the mixture of lognormal distributions under both expected utility (EU) and rank-dependent utility assumptions (RDEU). The obtained coefficients for the pre-crisis sample were: 2,81 (EU) and 4,41 (RDEU) while in the crisis sample, the coefficients obtained were: 0,47 (EU) and -1,94 (RDEU). In line with literature, by applying the real-world transformation (RDEU) to the mixture of lognormal distribution estimated RND produced distributions with higher mean, lower standard deviation, less negatively skewed and with lower Kurtosis.

Date of Award	17 Oct 2017
Original language	Portuguese
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Corrêa Guedes (Supervisor)