Constrained general regression in pseudo-Sobolev spaces with application to option pricing

Zdeněk Hlávka and Michal Peésta

No 2006-069, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: State price density (SPD) contains important information concerning market expectations. In existing literature, a constrained estimator of the SPD is found by nonlinear least squares in a suitable Sobolev space. We improve the behavior of this estimator by implementing a covariance structure taking into account the time of the trade and by considering simultaneously both the observed Put and Call option prices.

Keywords: isotonic regression; Sobolev spaces; monotonicity; multiple observations; covariance structure; option price (search for similar items in EconPapers)
JEL-codes: C10 C13 C14 C20 C88 G13 (search for similar items in EconPapers)
Date: 2006
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