Bakshi, Kapadia, and Madan (2003) risk-neutral moment estimators: A Gram–Charlier density approach

Pakorn Aschakulporn () and Jin E. Zhang ()
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Pakorn Aschakulporn: University of Otago
Jin E. Zhang: University of Otago

Review of Derivatives Research, 2022, vol. 25, issue 3, No 1, 233-281

Abstract: Abstract This paper is a sequel to Aschakulporn and Zhang (J Futures Mark 42(3):365–388, 2022). The errors of the Bakshi et al. (Rev Financ Stud 16(1):101–143, 2003) risk-neutral moment estimators is studied using the Gram–Charlier density—with the skewness and excess kurtosis specified. To obtain skewness with (absolute) errors less than $$10^{-3}$$ 10 - 3 , the range of strikes ( $$K_{\min }, K_{\max }$$ K min , K max ) must contain at least 3/4 to 4/3 of the forward price and have a step size ( $$\Delta K$$ Δ K ) of no more than 0.1% of the forward price. The range of strikes and step size corresponds to truncation and discretization errors, respectively. This is consistent to Aschakulporn and Zhang (2022) for non-volatile market periods.

Keywords: Risk-neutral moment estimators; Gram–Charlier densities; Skewness; Kurtosis (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11147-022-09187-x

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