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Almeida, C. and Freire, G. (2022). Pricing of index options in incomplete markets Journal of Financial Economics, 144(1):174--205.

  • Journal
    Journal of Financial Economics
View publication

We characterize a set of risk-neutral measures associated with a comprehensive class of risk averse investors. From this set, we show how to construct option price bounds and recover the implied γ: a parameter uniquely identifying the marginal investor pricing a given option. Empirically, we find that S&P 500 option prices are reconciled by heterogeneous marginal investors who differ in their assessment of tail risk. This heterogeneity is time-varying, decreases during financial crises, and provides novel insights into the skew patterns of index options. The recovered investors{\textquoteright} preferences related to compensation for downside risk help predict future market returns.