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| Author: | Ziegler, A. |
| Title: | State-price densities under heterogeneous beliefs, the smile effect, and implied risk aversion |
| Journal: | European Economic Review
2002 : SEP, VOL. 46:8, p. 1539-1557 |
| Index terms: | Assets Pricing Policy Risk aversion Economic theory |
| Language: | eng |
| Abstract: | It has been widely noted in the empirical literature that state-price densities implicit in financial asset prices are not log-normal. This paper shows that this phenomenon can be caused by heterogeneity in investors' beliefs. It derives the state-price density under heterogeneous beliefs in closed form and demonstrates that heterogeneous beliefs can give rise to multimodal state-price densities. Consequences for the smile effect in implied option volatility and for measures of risk aversion inferred from empirical state-price densities are discussed. |
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