Dynamics of state price densities

Wolfgang Karl Härdle and Zdenek Hlávka

Journal of Econometrics, 2009, vol. 150, issue 1, pages 1-15

Abstract: State price densities (SPDs) are an important element in applied quantitative finance. In a Black-Scholes world they are lognormal distributions, but in practice volatility changes and the distribution deviates from log-normality. In order to study the degree of this deviation, we estimate SPDs using EUREX option data on the DAX index via a nonparametric estimator of the second derivative of the (European) call pricing function. The estimator is constrained so as to satisfy no-arbitrage constraints and corrects for the intraday covariance structure in option prices. In contrast to existing methods, we do not use any parametric or smoothness assumptions.

Keywords: Option; pricing; State; price; density; Nonlinear; least; squares; Constrained; estimation (search for similar items in EconPapers)
Date: 2009

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6VC0 ... eb0aa4291d6bb617b7e9
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Dynamics of State Price Densities (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:econom:v:150:y:2009:i:1:p:1-15

Access Statistics for this article

Journal of Econometrics is edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao, P. M. Robinson and A. Zellner

More articles in Journal of Econometrics from Elsevier
Series data maintained by Heidi Boesdal ().