Option-Implied Risk Aversion Anomalies: Evidence From Japanese Market

Abstract

This paper empirically studied the relative risk aversion (RRA) implied from the options prices and historical returns of the Nikkei 225 index around the 2007-2008 subprime loan crisis. The extended use of Japanese option data and an estimation method of physical density are innovations introduced in this study. The RRA are typically downward sloping across the options. moneyness but show a clear U-shape and become negative around the at-the-money level. Also, the RRA level decreases substantially during the crisis. Previous studies have explained these anomalies as the result of a change in the investor mix or a mispricing of options.