Parametric Properties of Semi-Nonparametric Distributions, With Applications to Option Valuation

Enrique Sentana, Mencía, Javier and León, à Ngel
Authors registered in the RePEc Author Service: Javier Mencia ()

No 5435, CEPR Discussion Papers from Centre for Economic Policy Research

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 general than the truncated Gram-Charlier expansions of Jondeau and Rockinger (2001), who impose parameter restrictions to ensure positivity. We also use the SNP densities for option valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and study the 'Greeks'. We show that SNP densities generate wider option price ranges than the truncated expansions. In an empirical application to S&P 500 index options, we find that the SNP model beats the standard and Practitioner's Black-Scholes formulas, and the truncated expansions.

Keywords: Kurtosis; Density expansions; Gram-charlier; Skewness; S&p index options (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-ecm, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation (2009)
Working Paper: Parametric properties of semi-nonparametric distributions, with applications to option valuation (2007)
Working Paper: Parametric properties of semi-nonparametric distributions, with applications to option valuation (2007)
Working Paper: Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation (2005)
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