Nonparametric Estimation of State-Price Densities Implicit In Financial Asset Prices (1997)
| Venue: | JOURNAL OF FINANCE |
| Citations: | 143 - 3 self |
BibTeX
@ARTICLE{Aït-Sahalia97nonparametricestimation,
author = {Yacine Aït-Sahalia and Andrew W. Lo},
title = {Nonparametric Estimation of State-Price Densities Implicit In Financial Asset Prices},
journal = {JOURNAL OF FINANCE},
year = {1997},
volume = {53},
pages = {499--547}
}
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Abstract
Implicit in the prices of traded financial assets are Arrow-Debreu prices or, with continuous states, the state-price density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and derive its asymptotic sampling theory. This estimator provides an arbitrage-free method of pricing new, complex, or illiquid securities while capturing those features of the data that are most relevant from an asset-pricing 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.
