Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation

Ángel León, Javier Mencia () and Enrique Sentana

Working Papers from CEMFI

Abstract: We derive the statistical properties of the SNP densities of Gallant and Nychka (1987). We show that these densities, which are always positive, are more general than the truncated Gram-Charlier expansions of Jondeau and Rochinger (2001), who impose parameter restrictions to ensure positivity. We also use the SNP densities for option valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and study the “Greeks”. We show that SNP densities generate wider option price ranges than the truncated expansions. In an empirical application to S&P 500 index options, we find that the SNP model beats the standard and Practitioner’s Black-Scholes formulas, and truncated expansions.

Date: 2005
New Economics Papers: this item is included in nep-fin and nep-fmk
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Citations: View citations in EconPapers (2)

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https://www.cemfi.es/ftp/wp/0509.pdf (application/pdf)

Related works:
Journal Article: Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation (2009)
Working Paper: Parametric properties of semi-nonparametric distributions, with applications to option valuation (2007)
Working Paper: Parametric properties of semi-nonparametric distributions, with applications to option valuation (2007)
Working Paper: Parametric Properties of Semi-Nonparametric Distributions, With Applications to Option Valuation (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2005_0509

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