Nonparametric estimation of state-price densities implicit in financial asset prices
نویسندگان
چکیده
Implicit in the prices of traded nancial 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
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Derivatives Conference at FDIC, and the 2007 China International Conference in Finance for helpful discussions. We are responsible for any remaining errors.
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