SSRN Author: Margaret SundbergMargaret Sundberg SSRN Content
https://privwww.ssrn.com/author=3580870
https://privwww.ssrn.com/rss/en-usFri, 05 Mar 2021 01:09:09 GMTeditor@ssrn.com (Editor)Fri, 05 Mar 2021 01:09:09 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Irreducible Risks: Fallacy of Risk-Neutral Approach to OptionsThis paper compares two approaches to options: (1) Risk-Aware Approach, and (2) Risk-Neutral Approach. The risk-aware approach requires a probabilistic specification of the underlying’s returns, addressing higher than second moments, as hedging errors are singularly dependent on the excess kurtosis of the returns. Becoming risk-aware requires explicitly assessing hedge slippage of a hedging strategy to attempt option replication. In contrast, the risk-neutral tautology sets the option price equal to an expectation of option payoff under a risk-neutral probability that is inferred from option prices and under which the asset does not expect to accrete/deplete wealth. In the presence of irreducible risks, while a risk-neutral probability measure may be fit to observed option prices, it does not inform about the partitioning between expected attempted replication costs and compensation for irreducible risks. In segmented option markets with distinct risk premiums such a risk-neutral ...
https://privwww.ssrn.com/abstract=3761304
https://privwww.ssrn.com/1998006.htmlThu, 04 Mar 2021 08:56:30 GMTREVISION: Irreducible Risks: Fallacy of Risk-Neutral Approach to OptionsThis paper compares two approaches to options: (1) Risk-Aware Approach, and (2) Risk-Neutral Approach. The risk-aware approach requires a probabilistic specification of the underlying’s returns, addressing higher than second moments, as hedging errors are singularly dependent on the excess kurtosis of the returns. Becoming risk-aware requires explicitly assessing hedge slippage of a hedging strategy to attempt option replication. In contrast, the risk-neutral tautology sets the option price equal to an expectation of option payoff under a risk-neutral probability that is inferred from option prices and under which the asset does not expect to accrete/deplete wealth. In the presence of irreducible risks, while a risk-neutral probability measure may be fit to observed option prices, it does not inform about the partitioning between expected attempted replication costs and compensation for irreducible risks. In segmented option markets with distinct risk premiums such a risk-neutral ...
https://privwww.ssrn.com/abstract=3761304
https://privwww.ssrn.com/1983583.htmlSat, 23 Jan 2021 10:30:10 GMTREVISION: Irreducible Risks: Fallacy of Risk-Neutral Approach to OptionsThis paper compares two approaches to options: (1) Risk-Aware Approach, and (2) Risk-Neutral Approach. The risk-aware approach requires a probabilistic specification of the underlying’s returns, addressing higher than second moments, as hedging errors are singularly dependent on the excess kurtosis of the returns. Becoming risk-aware requires explicitly assessing hedge slippage of a hedging strategy to attempt option replication. In contrast, the risk-neutral tautology sets the option price equal to an expectation of option payoff under a risk-neutral probability that is inferred from option prices and under which the asset does not expect to accrete/deplete wealth. In the presence of irreducible risks, while a risk-neutral probability measure may be fit to observed option prices, it does not inform about the partitioning between expected attempted replication costs and compensation for irreducible risks. In segmented option markets with distinct risk premiums such a risk-neutral ...
https://privwww.ssrn.com/abstract=3761304
https://privwww.ssrn.com/1981043.htmlFri, 15 Jan 2021 08:52:27 GMTREVISION: Irreducible Risks: Fallacy of Risk-Neutral Approach to OptionsThis paper compares two approaches to options: (1) Risk-Aware Approach, and (2) Risk-Neutral Approach. The risk-aware approach requires a probabilistic specification of the underlying’s returns, addressing higher than second moments, as hedging errors are singularly dependent on the excess kurtosis of the returns. Becoming risk-aware requires explicitly assessing hedge slippage around a hedging strategy to attempt option replication. In contrast, the risk-neutral tautology sets the option price equal to an expectation of option payoff under a risk-neutral probability that is inferred from option prices and under which the asset does not expect to accrete/deplete wealth. In the presence of irreducible risks, while a risk-neutral probability measure may be fit to observed option prices, it does not inform about the partitioning between expected attempted replication costs and compensation for irreducible risks. In segmented option markets with distinct risk premiums such a risk-neutral ...
https://privwww.ssrn.com/abstract=3761304
https://privwww.ssrn.com/1978246.htmlThu, 07 Jan 2021 16:27:22 GMT