NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Sang Byung Seo

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Working Papers and Chapters

November 2013Option Prices in a Model with Stochastic Disaster Risk
with Jessica A. Wachter: w19611
Recent work suggests that the consumption disaster-based explanation of the equity premium is inconsistent with the average implied volatilities from option data. We resolve this inconsistency in a model with stochastic disaster risk (SDR). The SDR model explains average implied volatilities, even when calibrated to consumption and aggregate market data alone. We extend the benchmark SDR model to one that allows for variation in the risk of disaster at different time scales. This extension can match both the time series of implied volatilities, as well as the average implied volatility curve.

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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