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105
Nonparametric Estimation of StatePrice Densities Implicit In Financial Asset Prices
 JOURNAL OF FINANCE
, 1997
"... Implicit in the prices of traded financial assets are ArrowDebreu prices or, with continuous states, the stateprice density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and derive its asymptotic sampling theory. This estimator provides an arbitragefree metho ..."
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Cited by 339 (6 self)
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Implicit in the prices of traded financial assets are ArrowDebreu prices or, with continuous states, the stateprice density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and derive its asymptotic sampling theory. This estimator provides an arbitragefree method of pricing new, complex, or illiquid securities while capturing those features of the data that are most relevant from an assetpricing perspective, e.g., negative skewness and excess kurtosis for asset returns, volatility "smiles" for option prices. We perform Monte Carlo experiments and extract the SPD from actual S&P 500 option prices.
Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices
, 2001
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Stochastic differential utility
 Econometrica
, 1992
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Cited by 111 (4 self)
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Dynamic Asset Allocation under Inflation
 Journal of Finance
, 2002
"... Wachter, two anonymous referees, and participants at the Brown Bag Micro Finance Lunch Seminar at the Wharton ..."
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Cited by 85 (3 self)
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Wachter, two anonymous referees, and participants at the Brown Bag Micro Finance Lunch Seminar at the Wharton
Twoperson dynamic equilibrium in the capital market
 Review of Financial Studies
, 1989
"... Wben several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors ' portfolio ..."
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Cited by 71 (4 self)
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Wben several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors ' portfolio choice and the equilibrium in the capital market. This article features two investors, with the same degree of impatience, one of them being logarithmic and the other having an isoelastic utility function. They face one risky constantreturntoscale stationary production opportunity and they can borrow and lend to and from each other. The behaviors of the allocation of wealth and of the aggregate capital stock are characterized, along with the behavior of the rate of interest, the security market line, and the portfolio boldings. The twoinvestor equilibrium problem is as basic to financial economics as is the twobody problem to mechanics. Yet, to my knowledge, no complete description of the dynamic interaction between two investors
A variational problem arising in financial economics
, 1991
"... We provide sufficient conditions for a dynamic consumptionportfolio problem in continuous time to have a solution for a class of utility functions, when the price system follows a diffusion process and when the space of admissible policies is a linear space. Besides a regularity condition, it suffi ..."
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Cited by 70 (1 self)
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We provide sufficient conditions for a dynamic consumptionportfolio problem in continuous time to have a solution for a class of utility functions, when the price system follows a diffusion process and when the space of admissible policies is a linear space. Besides a regularity condition, it suffices to check whether a uniform growth and a local Lipschitz condition are satisfied by the parameters of a system of stochastic differential equations, which is completely derived from the price system. The class of utility functions includes concave functions that are, roughly, either bounded from below or strictly concave, and whose coefficients of relative risk aversion have nonzero limit infima as consumption/wealth goes to infinity. 'The authors would like to acknowledge helpful conversations with Sergiu Hart, Andreu Mas Colell, and HoMou Wu. The expositions of this paper were improved by comments from two anonymous referees. Various comments were made
The price impact and survival of irrational traders
 Journal of Finance
, 2006
"... Milton Friedman argued that irrational traders will consistently lose money, won’t survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price influence have been assumed to be the same. Often partial equilibrium analysis has been relied upon to exa ..."
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Cited by 66 (4 self)
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Milton Friedman argued that irrational traders will consistently lose money, won’t survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price influence have been assumed to be the same. Often partial equilibrium analysis has been relied upon to examine the survival of irrational traders and to make inferences on their influence on prices. In this paper, we demonstrate that survival and influence on prices are two independent concepts. The price impact of irrational traders does not rely on their longrun survival and they can have a significant impact on asset prices even when their wealth becomes negligible. In addition, in contrast to a partial equilibrium analysis, general equilibrium considerations matter since the ability of irrational traders to impact prices even when their wealth is diminishing can significantly affect their chances for longrun survival. In sum, in a longrun equilibrium, we explicitly show that price impact can occur whether or not the irrational traders survive. In related work, we show that even if the irrational
Continuoustime methods in finance: A review and an assessment
 Journal of Finance
, 2000
"... I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. ..."
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Cited by 52 (0 self)
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I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance. This latter subperiod has seen significant progress in econometric theory, computational and estimation methods to test and implement continuoustime models. Capital market frictions and bargaining issues are being increasingly incorporated in continuoustime theory. THE ROOTS OF MODERN CONTINUOUSTIME METHODS in finance can be traced back to the seminal contributions of Merton ~1969, 1971, 1973b! in the late 1960s and early 1970s. Merton ~1969! pioneered the use of continuoustime modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting.
The consumptionbased capital asset pricing model
 Econometrica
, 1959
"... The paper provides conditions on the primitives of a continuoustime economy under which there exist equilibria obeying the ConsumptionBased Capital Asset Pricing Model (CCAPM). The paper also extends the equilibrium characterization of interest rates of Cox, Ingersoll, and Ross (1985) to multiage ..."
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Cited by 52 (5 self)
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The paper provides conditions on the primitives of a continuoustime economy under which there exist equilibria obeying the ConsumptionBased Capital Asset Pricing Model (CCAPM). The paper also extends the equilibrium characterization of interest rates of Cox, Ingersoll, and Ross (1985) to multiagent economies. We do not use a Markovian state assumption.
Multiperiod security markets with differential information: martingales and resolution times
 Journal of Mathematical Economics
, 1986
"... We model multiperiod securities markets with differential information. A price system that admits no free lunches is related to martingales when agents have rational expectations. We introduce the concept of resolution time, and show that a better informed agent and a less informed agent must agree ..."
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Cited by 47 (3 self)
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We model multiperiod securities markets with differential information. A price system that admits no free lunches is related to martingales when agents have rational expectations. We introduce the concept of resolution time, and show that a better informed agent and a less informed agent must agree on the resolution times of commonly marketed events if they have rational expectations and if there are no free lunches. It then follows that if all elementary events are marketed for a less informed agent then any price system that admits no free lunches to a better informed agent must eliminate any private information asymmetry between the two. We provide an example of a dynamically fully revealing price system that is arbitrage free and yields elementarily complete markets.