Pricing S&P 500 Index Options: A Conditional Semi‐Nonparametric Approach

Massimo Guidolin and Erwin Hansen

Journal of Futures Markets, 2016, vol. 36, issue 3, 217-239

Abstract: We price S&P 500 index options under the assumption that the conditional risk‐neutral density function of the index follows a Semi‐Nonparametric (SNP) process with GARCH variance. The model is estimated combining a set of option contracts written on the index and the daily index return time series in the period 1996–2011. The in‐sample and out‐sample performance of the model is compared with several benchmark models, beating most of them. We conclude that a pricing model dealing simultaneously with non‐normalities and time‐varying volatility helps to mitigate the observed S&P 500 index option biases. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:217–239, 2016

Date: 2016
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