NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Nonparametric Risk Management and Implied Risk Aversion

Yacine Ait-Sahalia, Andrew W. Lo

NBER Working Paper No. 6130 (Also Reprint No. r2258)
Issued in March 2000
NBER Program(s):   AP

Typical value-at-risk (VAR) calculations involve the probabilities of extreme dollar losses, based on the statistical distributions of market prices. Such quantities do not account for the fact that the same dollar loss can have two very different economic valuations, depending on business conditions. We propose a nonparametric VAR measure that incorporates economic valuation according to the state-price density associated with the underlying price processes. The state-price density yields VAR values that are adjusted for risk aversion, time preferences, and other variations in economic valuation. In the context of a representative agent equilibrium model, we construct an estimator of the risk-aversion coefficient that is implied by the joint observations on the cross-section of option prices and time-series of underlying asset values. "

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Document Object Identifier (DOI): 10.3386/w6130

Published: Journal of Econometrics, Vol. 94 (2000): 9-51. citation courtesy of

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