Risk-Neutral Moment-Based Estimation of Affine Option Pricing Models
Bruno Feunou () and
Staff Working Papers from Bank of Canada
This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from a panel of option prices and exploit linear relationships between risk-neutral cumulants and latent factors within the continuous time affine stochastic volatility framework. We find that fitting the Andersen, Fusari, and Todorov (2015b) option valuation model to risk-neutral moments captures the bulk of the information in option prices. Our estimation strategy is effective, easy to implement, and robust, as it allows for a direct linear filtering of the latent factors and a quasi-maximum likelihood estimation of model parameters. From a practical perspective, employing risk-neutral moments instead of option prices also helps circumvent several sources of numerical errors and substantially lessens the computational burden inherent in working with a large panel of option contracts.
Keywords: Asset pricing; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 64 pages
New Economics Papers: this item is included in nep-ecm and nep-ore
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Journal Article: Risk‐neutral moment‐based estimation of affine option pricing models (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-55
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