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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | State-Price Densities under Heterogeneous Beliefs, the Smile Effect, and Implied Risk Aversion |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | European Economic Review |
| Publisher | Elsevier |
| Geographical Reach | international |
| Volume | 46 |
| Number | 8 |
| Page Range | 1539 - 1557 |
| Date | 2002 |
| Abstract Text | 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. |
| Digital Object Identifier | 10.1016/S0014-2021(01)00200-8 |
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