Option pricing with random risk aversion

Abstract Based on a standard general equilibrium economy, we develop framework for pricing European options where the risk aversion parameter is state dependent, and aggregate wealth underlying asset have bivariate transformed-normal distribution. Our results show that volatility skewness of change slope kernel, that, as increases, (Black Scholes) implied shifts upwards but its shape remains same, which implies does not neutral Also, demonstrate kernel may become non-monotonic high levels low parameter. An empirical example shows estimated tends to be in periods market vice-versa.