Research On Time-Varying Risk Aversion In Chinese Option Market

Risk aversion is a characteristic of a person's preference when people bears risk.It can help us to understand the behavior of investors in the financial market.In traditional economic theory,the relative risk aversion coefficient is assumed to be constant,that is,investors often show constant relative risk aversion.Under this assumption,however,scholars have discovered the “the equity premium puzzle” and illustrated that the assumption of constant relative risk aversion does not fit into the actual financial market.In recent years,more and more scholars have empirically demonstrated the time-varying nature of relative risk aversion,and conducted a large number of studies on time-varying risk aversion from different aspects.In the theoretical framework of the behavioral pricing kernel,this paper uses the SSE 50 ETF and its option price data to study the empirical pricing kernel and time-varying risk aversion in the Chinese option market.Firstly,under the non-affine GARCH diffusion model,the objective probability parameters of the model are estimated by the maximum likelihood estimation method based on the effective importance sampling.Then,by minimizing the sum of squared pricing errors,the risk-neutral parameters of the GARCH diffusion model are estimated.Then,based on the obtained objective and risk-neutral parameters and volatility,the objective and risk-neutral densities are calculated,and the empirical pricing kernel for Chinese option market is further obtained.Finally,under the framework of behavioral pricing kernel theory,through the relationship between the empirical pricing kernel and the constant relative risk aversion stochastic discount factor(CRRA SDF),the relative risk aversion that changes with time is estimated,and the time-varying risk aversion is studied.The empirical results show that:(1)There is a reference point,which corresponds to the SSE 50 ETF return of approximately 5%.The empirical pricing kernel is increasing on the left side of the reference point,corresponding to a convex utility function and investors' risk seeking behavior;empirical pricing kernel is monotonically decreasing on the right side of the reference point,corresponding to a concave utility function and investors' risk aversion.Comparing with other researches on the empirical pricing kernel of Hong Kong's financial market,we found that the reference points of empirical pricing kernels in Chinese option market correspond to higher return.This shows that Chinese investors are more irrational because they are exposed to risk seeking in more situations,which may be related to more individual investors in Chinese option market.(2)The risk aversion of Chinese investors is time-varying,and follows financial market conditions.In the bull market,investors are reluctant to lose the wealth taht they have already acquired.They are even more risk-averse and have higher levels of risk aversion.In the bear market,those who are unwilling to bear the existing losses will continue to stay in the market,bear market uncertainty,reduce the level of risk aversion,and tend to risk seeking.