On a robust estimation of option-implied interest rates and dividend yields

Muoria Kamau and Ivivi J. Mwaniki

Cogent Economics & Finance, 2023, vol. 11, issue 2, 2260658

Abstract: In this paper, a simple no-arbitrage methodology to estimate option-implied interest rates and dividend yields simultaneously via a regression model is employed. Since the mean-based least squares estimation places equal weights on all data points making it sensitive to outliers, a robust median-based estimation approach is proposed. The proposed methodology is only valid for European options; consequently, an empirical analysis is conducted on options on the S & P 500 Index. Robust forward-looking model-free estimates of the risk-free interest rate and dividend yield, based exclusively on market prices of options, are thus obtained.

Date: 2023
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DOI: 10.1080/23322039.2023.2260658

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