Extracting Information from Options Markets: Smiles, State–Price Densities and Risk Aversion

Abstract

In this paper, recent techniques of estimating implied information from derivatives markets are presented and applied empirically to the French derivatives market. We determine nonparametric implied volatility functions, state–price densities and historical densities from a high–frequency CAC 40 stock index option dataset. Moreover, we construct an estimator of the risk aversion function implied by the joint observation of the cross–section of option prices and time–series of underlying asset value. We report a decreasing implied volatility curve with the moneyness of the option. The estimated relative risk aversion functions are positive and globally consistent with the decreasing relative risk aversion assumption.