Learning the Stochastic Discount Factor via Nonparametric Option Portfolios

Emanuele Luzzi, Paul Schneider and Rohan Sen
Additional contact information
Emanuele Luzzi: Swiss Finance Institute - USI Lugano
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute
Rohan Sen: USI Lugano

No 25-87, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We estimate the stochastic discount factor (SDF) by recovering the Sharpe-optimal nonlinear claim through a trading strategy in delta-hedged option portfolios. Our nonparametric approach leverages the classical duality between the minimum-variance SDF and the maximum Sharpe ratio portfolio, and comes with finite-sample performance guarantees, as well as a formal testing framework for the monotonicity and convexity of the SDF. We perform an empirical study in the S&P 500 market and find heterogeneous shapes across different states of the world as measured by the price of volatility and the maturities of options. While SDF implied by monthly options are monotonically decreasing, their convexity/concavity is less pronounced. Ultra-short ODTE options, on the contrary, exhibit a pronounced U-shape in higher-volatility states. Our empirical results are robust across various models of the information set.

Keywords: Machine Learning; Portfolio Choice; Options; Asset Pricing; Stochastic Discount Factor (search for similar items in EconPapers)
JEL-codes: C14 C58 G11 G12 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2025-10
New Economics Papers: this item is included in nep-inv
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5634612 (application/pdf)

Related works:
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: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2587

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().