Estimation of State-price Densities

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This research project has constructed theoretical models to analyze how risk premium, liquidity premium, and convenience yields are reflected in derivative pricing, and empirically tested those models using derivative prices observed in financial markets in Japan. "Nonparametric estimation of state-price densities : An application of the local polynomial estimator" by Takagi and Saito (under review) estimates state-price densities using the index option prices listed in the Osaka Stock Exchange. In particular, this study applies local polynomial estimators, one of nonparametric estimators, in consideration for fewer points of exercise prices in the OSE. Saito and Ohnishi (2001) investigate the impact of changes in securities included in the Nikkei Index in April 2000, and find that individual stock prices reflected changes in market liquidity significantly. Fukuta, Saito, and Takagi (forthcoming) quantify convenience yields on JGBs exploiting the information of interest-rate swap spreads, and identify several factors, which contribute to yielding convenience. Fukuta and Saito (forthcoming), on the other hand, empirically examines the liquidity effect on forward exchange rates.