Nonparametric Option Pricing with No-Arbitrage Constraints

Melanie Birke and Kay F. Pilz

Journal of Financial Econometrics, 2009, vol. 7, issue 2, 53-76

Abstract: We propose a completely kernel based method of estimating the call price function or the state price density of options. The new estimator of the call price function fulfills the constraints like monotonicity and convexity given in Breeden and Litzenberger (1978) without necessarily estimating the state price density for an underlying asset price from its option prices. It can be shown that the call price estimator is pointwise consistent and asymptotically normal. The estimator of the state price density is also consistent. In a simulation study we compare the new estimators to the estimators given in Aït-Sahalia and Duarte (2003). Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
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