Semi-parametric estimation of American option prices

Patrick Gagliardini () and Diego Ronchetti

Journal of Econometrics, 2013, vol. 173, issue 1, 57-82

Abstract: We introduce a novel semi-parametric estimator of American option prices in discrete time. The specification is based on a parameterized stochastic discount factor and is nonparametric w.r.t. the historical dynamics of the Markovian state variables. The historical transition density estimator minimizes a distance built on the Kullback–Leibler divergence from a kernel transition density, subject to the no-arbitrage restrictions for a non-defaultable bond, the underlying asset and some American option prices. We use dynamic programming to make explicit the nonlinear restrictions on the Euclidean and functional parameters coming from option data. We study asymptotic and finite sample properties of the estimators.

Keywords: American option; Kernel estimator; Semi-parametric estimation; Dynamic programming; Fréchet derivative (search for similar items in EconPapers)
JEL-codes: C14 C60 G13 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:173:y:2013:i:1:p:57-82

DOI: 10.1016/j.jeconom.2012.10.002

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