Drift Estimation of Generalized Security Price Processes from High Frequency Derivative Prices

Gurupdesh Pandher

Review of Derivatives Research, 2000, vol. 4, issue 3, 263-284

Abstract: This paper presents a framework for using high frequency derivative prices to estimate the drift of generalized security price processes. This work may be seen more generally as a quasi-likelihood approach to estimating continuous-time parameters of derivative pricing models using discrete option data. We develop a generalized derivative-based estimator for the drift where the underlying security price process follows any arbitrary state-time separable diffusion process (including arithmetic and geometric Brownian motion as special cases). The framework provides a method to measure premia in derivative prices, test for risk-neutral pricing and leads to a new empirical approach to pricing derivative contingent claims. A sufficient condition for the asymptotic consistency of the generalized estimator is also obtained. A study based on generating the S&P500 index and calls shows that the estimator can correctly estimate the drift parameter. Copyright Kluwer Academic Publishers 2000

Keywords: excess return; market price of risk; risk-neutral pricing; quasi-likelihood estimation; Feynman-Kac; asymptotic consistency (search for similar items in EconPapers)
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:4:y:2000:i:3:p:263-284

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DOI: 10.1023/A:1011383413977

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