Dynamics of state price densities

Wolfgang Härdle and Zdenek Hlávka

Journal of Econometrics, 2009, vol. 150, issue 1, 1-15

Abstract: State price densities (SPDs) are an important element in applied quantitative finance. In a Black-Scholes world they are lognormal distributions, but in practice volatility changes and the distribution deviates from log-normality. In order to study the degree of this deviation, we estimate SPDs using EUREX option data on the DAX index via a nonparametric estimator of the second derivative of the (European) call pricing function. The estimator is constrained so as to satisfy no-arbitrage constraints and corrects for the intraday covariance structure in option prices. In contrast to existing methods, we do not use any parametric or smoothness assumptions.

Keywords: Option; pricing; State; price; density; Nonlinear; least; squares; Constrained; estimation (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:150:y:2009:i:1:p:1-15

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