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Nonparametric estimates of pricing functionals

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  • Marinelli, Carlo
  • d’Addona, Stefano

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, à 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.

Suggested Citation

  • Marinelli, Carlo & d’Addona, Stefano, 2017. "Nonparametric estimates of pricing functionals," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 19-35.
    • Handle: RePEc:eee:empfin:v:44:y:2017:i:c:p:19-35
    DOI: 10.1016/j.jempfin.2017.07.005
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    Cited by:

    1. Carlo Marinelli & Stefano d’Addona, 2023. "Nonparametric estimates of option prices via Hermite basis functions," Annals of Finance, Springer, vol. 19(4), pages 477-522, December.
    2. Carlo Marinelli & Stefano d'Addona, 2022. "Nonparametric estimates of option prices via Hermite basis functions," Papers 2209.09656, arXiv.org, revised Aug 2023.

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    More about this item

    Keywords

    Nadaraya–Watson estimator; Option pricing; Implied volatility estimators; Smoothing;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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