Stock Market Insurance Prices, BL Skew, Conditional Marginal Utilities and the Equity Risk Premium

Vol. 22, No. 3, 2024
Douglas T. Breeden

Option prices contain information about implicit state prices. In their recent article, Breeden and Litzenberger (B-L, 2022) demonstrated how option pricesin bond marketsfrom interest rate cap and floor price data can be used to identify the impacts of central bank policies on the distribution of state prices for future interest rates. They examined the massive central bank interventions during the 20-year period from 2003 to 2022 for the USA, the Eurozone and the United Kingdom and their nonparametric technique identified substantial impacts. In this article, we focus on the information from option prices on equities, specifically the S&P 500 index for US stock prices and likely fluctuations in the equity risk premium at different times.