Nonparametric state price density estimation using constrained least squares and the bootstrap |
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Authors: | Adonis Yatchew Wolfgang Härdle |
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Institution: | 1. Department of Economics, University of Toronto, 150 St. George St., Toronto, Canada M5S 3G7;2. Humboldt-Universität zu Berlin, Center for Applied Statistics and Economics, Germany |
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Abstract: | The economic theory of option pricing imposes constraints on the structure of call functions and state price densities. Except in a few polar cases, it does not prescribe functional forms. This paper proposes a nonparametric estimator of option pricing models which incorporates various restrictions (such as monotonicity and convexity) within a single least squares procedure. The bootstrap is used to produce confidence intervals for the call function and its first two derivatives and to calibrate a residual regression test of shape constraints. We apply the techniques to option pricing data on the DAX. |
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Keywords: | C14 G12 |
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