Title :
Nonparametric estimation of state-price densities implicit in financial asset prices
Author :
Aït-Sahalia, Yacine ; Lo, Andrew W.
Author_Institution :
Graduate Sch. of Bus., Chicago Univ., IL, USA
Abstract :
Implicit in the prices of traded financial assets are Arrow-Debreu state prices or, in the continuous-state case, the state-price density (SPD) that may be used to price all assets, traded or non-traded. Using recently developed techniques in nonparametric analysis, we construct an estimator for the SPD implicit in financial asset prices and we derive an asymptotic sampling theory for this estimator to gauge its accuracy. We perform Monte Carlo simulation experiments to see whether the SPD estimator can be used successfully to price and hedge derivative securities, and we also provide several illustrative empirical examples using both hypothetical and actual options prices on S&P 500 index options
Keywords :
Monte Carlo methods; finance; securities trading; statistical analysis; Arrow-Debreu state prices; Monte Carlo simulation; asset pricing; asymptotic sampling theory; continuous-state case; financial asset prices; nonparametric analysis; nonparametric estimation; state-price densities; state-price density; traded financial assets; Asset management; Data security; Estimation theory; Financial management; Kernel; Pricing; Sampling methods; State estimation;
Conference_Titel :
Computational Intelligence for Financial Engineering, 1995.,Proceedings of the IEEE/IAFE 1995
Conference_Location :
New York, NY
Print_ISBN :
0-7803-2145-6
DOI :
10.1109/CIFER.1995.495227