2012
DOI: 10.1590/s1413-80502012000400002
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Eatimating risk aversion, Risk-Neutral and Real-World Densities using Brasilian Real currency options

Abstract: This paper uses the Liu et al. (2007) approach to estimate the optionimplied Risk-Neutral Densities (RND), real-world density (RWD), and relative risk aversion from the Brazilian Real/US Dollar exchange rate distribution. Our empirical application uses a sample of exchange-traded Brazilian Real currency options from 1999 to 2011. Our estimated value of the relative risk aversion is around 2.7, which is in line with other articles for the Brazilian Economy. Our out-of-sample results showed that the RND has some… Show more

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Cited by 14 publications
(6 citation statements)
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“…The two assigned values are the inverse intertemporal elasticity of substitution parameter, σ = 1.5, and the depreciation rate, δ = 0.03. The intertemporal elasticity is in line with most of the literature on consumption surveyed by Attanasio and Weber (2010) and also with the Brazil-specific literature that estimates σ in the range from 1 to 3 (e.g., Gandelman and Hernández-Murillo, 2014;Fajardo, Ornelas, and Farias, 2012). The depreciation rate is in the common range of values used in the macro literature.…”
Section: Calibrationsupporting
confidence: 83%
“…The two assigned values are the inverse intertemporal elasticity of substitution parameter, σ = 1.5, and the depreciation rate, δ = 0.03. The intertemporal elasticity is in line with most of the literature on consumption surveyed by Attanasio and Weber (2010) and also with the Brazil-specific literature that estimates σ in the range from 1 to 3 (e.g., Gandelman and Hernández-Murillo, 2014;Fajardo, Ornelas, and Farias, 2012). The depreciation rate is in the common range of values used in the macro literature.…”
Section: Calibrationsupporting
confidence: 83%
“…The two assigned values are the inverse intertemporal elasticity of substitution parameter, σ = 1.5, and the depreciation rate, δ = 0.06. The intertemporal elasticity is in line with most of the literature on consumption surveyed by Attanasio and Weber (2010) and also with the Brazil-specific literature that estimates σ in the range from 1 to 3 (e.g., Gandelman and Hernández-Murillo, 2014;Fajardo, Ornelas, and Farias, 2012). The depreciation rate is commonly used in the macro growth literature.…”
Section: Calibrationsupporting
confidence: 81%
“…11 We fix the coefficient of relative risk aversion, γ, to 2.0, in line with the bulk of the literature on consumption surveyed by Attanasio (1999). This value is also consistent with the literature that estimates γ using Brazilian data, which suggests a range from 1 to 3 (see, for example, Gandelman and Hernández-Murillo (2014) and Fajardo et al (2012)). Then we choose the share of leisure in the utility function, ρ t to match average hours for different age groups and the average labor force participitation.…”
Section: Model Period and Age Distributionsupporting
confidence: 64%