The Price of Correlation Risk: Evidence from Equity Options
Published: 5/20/2009, Volume: 64, Issue: 3 | DOI: 10.1111/j.1540-6261.2009.01467.x | Cited by: 356
JOOST DRIESSEN, PASCAL J. MAENHOUT, GRIGORY VILKOV
We study whether exposure to marketwide correlation shocks affects expected option returns, using data on S&P100 index options, options on all components, and stock returns. We find evidence of priced correlation risk based on prices of index and individual variance risk. A trading strategy exploiting priced correlation risk generates a high alpha and is attractive for CRRA investors without frictions. Correlation risk exposure explains the cross‐section of index and individual option returns well. The correlation risk premium cannot be exploited with realistic trading frictions, providing a limits‐to‐arbitrage interpretation of our finding of a high price of correlation risk.
Model Ambiguity versus Model Misspecification in Dynamic Portfolio Choice
Published: 1/21/2026, Volume: 81, Issue: 3 | DOI: 10.1111/jofi.70027 | Cited by: 0
PASCAL J. MAENHOUT, HAO XING, ANNE G. BALTER
We study aversion to model ambiguity and misspecification in dynamic portfolio choice. Risk‐averse investors (relative risk aversion ) fear return persistence, while risk‐tolerant investors () fear mean reversion, when confronting model misspecification concerns of identically and independently distributed (IID) returns. The intuition is that risk‐averse investors, who want to hedge intertemporally, endogenously fear return persistence, which precludes hedging. A log investor is myopic and unaffected by model misspecification, therefore only worrying about model ambiguity. Our model can generate belief scarring, nonparticipation in equity markets, and extrapolative return expectations. Extending beyond IID returns, we study model misspecification for a mean‐reverting Sharpe ratio.
Longevity, Health, and Housing Risk Management in Retirement
Published: 8/25/2026, Volume: , Issue: | DOI: 10.1111/jofi.70077 | Cited by: 0
PIERRE‐CARL MICHAUD, PASCAL ST‐AMOUR
Annuities, long‐term care insurance, and reverse mortgages remain puzzlingly unpopular to manage post‐retirement longevity, health, and housing price risks. We use a flexible life‐cycle model structurally estimated with a unique stated‐preference survey experiment of Canadian households to understand why. Key factors include high risk aversion, concern over long‐run risks, strong discounting of valuation in disability states, imperfect housing substitutability, and bequest motives. The remaining disinterest is accounted for by information frictions and inertia. We also document evidence of public insurance crowding out, spousal co‐insurance, and responsiveness to product bundling.
The Credit Line Channel
Published: 8/27/2025, Volume: 80, Issue: 6 | DOI: 10.1111/jofi.13486 | Cited by: 28
DANIEL L. GREENWALD, JOHN KRAINER, PASCAL PAUL
Aggregate U.S. bank lending to firms expanded following the outbreak of COVID‐19. Using loan‐level supervisory data, we show that this expansion was driven by draws on credit lines by large firms. Banks that experienced larger credit line drawdowns restricted term lending more, crowding out credit to smaller firms, which reacted by reducing investment. A structural model calibrated to match our empirical results shows that while credit lines increase total bank credit in bad times, they redistribute credit from firms with high propensities to invest to firms with low propensities to invest, exacerbating the decrease in aggregate investment.