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Semi-parametric estimation of American option prices

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  • Gagliardini, Patrick
  • Ronchetti, Diego
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    Abstract

    We introduce a novel semi-parametric estimator of American option prices in discrete time. The specification is based on a parameterized stochastic discount factor and is nonparametric w.r.t. the historical dynamics of the Markovian state variables. The historical transition density estimator minimizes a distance built on the Kullback–Leibler divergence from a kernel transition density, subject to the no-arbitrage restrictions for a non-defaultable bond, the underlying asset and some American option prices. We use dynamic programming to make explicit the nonlinear restrictions on the Euclidean and functional parameters coming from option data. We study asymptotic and finite sample properties of the estimators.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 173 (2013)
    Issue (Month): 1 ()
    Pages: 57-82

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    Handle: RePEc:eee:econom:v:173:y:2013:i:1:p:57-82

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    Web page: http://www.elsevier.com/locate/jeconom

    Related research

    Keywords: American option; Kernel estimator; Semi-parametric estimation; Dynamic programming; Fréchet derivative;

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