2016/10/27 by Gianluca Frasso, Paul H. C. Eilers, Paul H.C. Eilers +2
Decision Sciences · Economics, Econometrics and Finance · Mathematics · #Applications (stat.AP) #Auction Theory and Applications #Capital Investment and Risk Analysis #FOS: Computer and information sciences #Stochastic processes and financial applications #stat.AP
paper · pdf · doi:10.48550/arxiv.1610.08665
openalex publication_date 2016/10/27 · arxiv created 2021/03/26 · arxiv updated 2021/03/29 · openalex created_date 2022/10/05 · openalex updated_date 2026/07/28
We present a model for direct semi-parametric estimation of the State Price Density (SPD) implied in quoted option prices. We treat the observed prices as expected values of possible pay-offs at maturity, weighted by the unknown probability density function. We model the logarithm of the latter as a smooth function while matching the expected values of the potential pay-offs with the observed prices. This leads to a special case of the penalized composite link model. Our estimates do not rely on any parametric assumption on the underlying asset price dynamics and are consistent with no-arbitrage conditions. The model shows excellent performance in simulations and in application to real data.