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| Author: | Fornari, F. Mele, A. |
| Title: | Recovering the probability density function of asset prices using garch as diffusion approximations |
| Journal: | Journal of Empirical Finance
2001 : MAR, VOL. 8:1, p. 83-110 |
| Index terms: | Assets Capital asset pricing Statistical methods Option valuation Stochastic processes |
| Language: | eng |
| Abstract: | This paper uses Garch models to estimate the objective and risk-neutral density functions of financial asset prices and by comparing their shapes, recover detailed informationon economic agents' attitudes toward risk. The objective PDF of the asset price is recovered from the estimation of a nonlinear Garch fitted to the historical path of the asset price. The risk-neutral PDF is extracted from cross-sections of bond option prices, after introducing a volatility risk premium function. The direct comparison of the shapes of the two PDF reveals the price attached by economic agents to the different states of nature. |
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