Nonparametric estimates of pricing functionals

Carlo Marinelli and Stefano d'Addona

Papers from arXiv.org

Abstract: We analyze the empirical performance of several non-parametric estimators of the pricing functional for European options, using historical put and call prices on the S&P500 during the year 2012. Two main families of estimators are considered, obtained by estimating the pricing functional directly, and by estimating the (Black-Scholes) implied volatility surface, respectively. In each case simple estimators based on linear interpolation are constructed, as well as more sophisticated ones based on smoothing kernels, \`a la Nadaraya-Watson. The results based on the analysis of the empirical pricing errors in an extensive out-of-sample study indicate that a simple approach based on the Black-Scholes formula coupled with linear interpolation of the volatility surface outperforms, both in accuracy and computational speed, all other methods.

Date: 2015-06, Revised 2017-09
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (3)

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Journal Article: Nonparametric estimates of pricing functionals (2017)
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