Risk preferences heterogeneity: Evidence from asset markets

Using asset market data, as well as theoretical relations between investors' preferences, option-implied, risk-neutral, probability distribution functions (PDFs, ) and index-implied, actual, PDFs, this paper extracts a time-series of investors' relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S&P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction- and market-yields of Treasury bills.