State price density estimation via nonparametric mixtures

DOI10.1214/09-AOAS246zbMATH Open1196.62134arXiv0910.1430MaRDI QIDQ985015FDOQ985015

Ming Yuan

Publication date: 20 July 2010

Published in: The Annals of Applied Statistics (Search for Journal in Brave)

Abstract: We consider nonparametric estimation of the state price density encapsulated in option prices. Unlike usual density estimation problems, we only observe option prices and their corresponding strike prices rather than samples from the state price density. We propose to model the state price density directly with a nonparametric mixture and estimate it using least squares. We show that although the minimization is taken over an infinitely dimensional function space, the minimizer always admits a finite dimensional representation and can be computed efficiently. We also prove that the proposed estimate of the state price density function converges to the truth at a ``nearly parametric rate.

Full work available at URL: https://arxiv.org/abs/0910.1430

zbMATH Keywords

nonparametric mixturestate price densityBlack-Scholes equationEuropean call options

Mathematics Subject Classification ID

Density estimation (62G07) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70)

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Cited In (4)

• Parametric risk-neutral density estimation via finite lognormal-Weibull mixtures
• State price densities implied from weather derivatives
• Semi-nonparametric estimation of the call-option price surface under strike and time-to-expiry no-arbitrage constraints
• INDEX OPTIONS AND VOLATILITY DERIVATIVES IN A GAUSSIAN RANDOM FIELD RISK-NEUTRAL DENSITY MODEL

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