Parametric properties of semi-nonparametric distributions, with applications to option valuation

Ángel León (), Javier Mencía () and Enrique Sentana ()
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Ángel León: Universidad de Alicante
Javier Mencía: Banco de España

No 707, Banco de España Working Papers from Banco de España

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 flexible than truncated Gram-Charlier expansions with positivity restrictions. We use the SNP densities for financial derivatives valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and analyse the semiparametric properties of our pricing model. In an empirical application to S&P500 index options, we compare our model to the standard and Practitioner's Black-Scholes formulas, truncated expansions, and the Generalised Beta and Variance Gamma models.

Keywords: kurtosis; density expansions; gram-charlier; skewness; s&p index options (search for similar items in EconPapers)
JEL-codes: G13 C16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2007-03
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http://www.bde.es/webbde/SES/Secciones/Publicacion ... o/07/Fic/dt0707e.pdf First version, March 2007 (application/pdf)

Related works:
Working Paper: PARAMETRIC PROPERTIES OF SEMI-NONPARAMETRIC DISTRIBUTIONS, WITH APPLICATIONS TO OPTION VALUATION (2005)
Working Paper: Parametric Properties of Semi-Nonparametric Distributions, With Applications to Option Valuation (2005)
Journal Article: Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:bde:wpaper:0707

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