TY  - JOUR
AU  - Ait-Sahalia,Yacine
AU  - Lo,Andrew W.
TI  - Nonparametric Risk Management and Implied Risk Aversion
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6130
PY  - 2000
Y2  - March 2000
UR  - http://www.nber.org/papers/w6130
L1  - http://www.nber.org/papers/w6130.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  - 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.  "
ER  -