Pricing with Splines

Christian Gourieroux and Alain Monfort

Annals of Economics and Statistics, 2006, issue 82, 3-33

Abstract: The exponential affine pricing principle is applied to the family of skewed Laplace historical distributions. The risk-neutral distribution is shown to belong to the same family and a closed form pricing formula for a European call is derived. This formula is a direct competitor of the Black-Scholes formula, but involves more parameters, that are location and tail parameters. This approach is extended to exponential affine spline conditional probability density function and stochastic discount factor leading to nonparametric pricing approaches. Finally the time coherency is introduced by means of a Markov specification.

Date: 2006
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Citations: View citations in EconPapers (6)

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Working Paper: Pricing with Splines (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2006:i:82:p:3-33

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