Semi-nonparametric estimation of the call price surface under strike and time-to-expiry no-arbitrage constraints

Matthias Fengler and Lin-Yee Hin ()

No 1136, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: We suggest a semi-nonparametric estimator for the entire call price surface based on a tensor-product B-spline. To enforce no-arbitrage constraints in strike and calendar dimensions we establish sufficient no-arbitrage conditions on the control net of the tensor product (TP) B-spline. Since these conditions are independent of the degrees of the underlying polynomials, the estimator can be parametrized with TP B-splines of arbitrary order. We derive consistency and explore the statistical efficiency benefits from surface estimation. As an application, we estimate families of state price densities and a local volatility surface for S&P500 option data.

Keywords: Option pricing function; no-arbitrage constraints; state price density; implied volatility; local volatility; semi-nonparametric estimation; B-splines (search for similar items in EconPapers)
JEL-codes: C14 C58 G13 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2011-09, Revised 2013-05
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2011:36

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