TY  - JOUR
AU  - Ait-Sahalia,Yacine
AU  - Lo,Andrew W.
TI  - Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5351
PY  - 1995
Y2  - November 1995
UR  - http://www.nber.org/papers/w5351
L1  - http://www.nber.org/papers/w5351.pdf
N1  - Author contact info:
Yacine Ait-Sahalia
Department of Economics
Fisher Hall
Princeton University
Princeton, NJ 08544-1021
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu

Andrew W. Lo
MIT Sloan School of Management
100 Main Street, E62-618
Cambridge, MA  02142
Tel: 617/253-0920
Fax: 781/891-9783
E-Mail: alo@mit.edu
AB  - Implicit in the prices of traded financial assets are Arrow- Debreu state prices or, in the continuous-state case, the state-price density (SPD).  We construct an estimator for the SPD implicit in option prices and derive an asymptotic sampling theory for this estimator to gauge its accuracy.  The SPD estimator provides an arbitrage-free method of pricing new, more complex, or less liquid 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 simulation experiments to show that the SPD estimator can be successfully extracted from option prices and we present an empirical application using S&P 500 index options.
ER  -