Bent Jesper Christensen () (Department of Management, University of Aarhus, Denmark) Nicholas M. Kiefer (Department of Economics, Cornell University, Ithaca, USA)
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A new simulation methodology for the empirical analysis of financial market data is introduced. The notion of an equivalent martingale measure is central to the approach. Contingent claims are priced without reference to the mean return or drift parameter. This implies that the simulator in the estimation procedure may be constructed under the equivalent martingale measure and simulation therefore takes place without specifying drift. The simulation is for conditional moments as opposed to unconditional, and the inference procedure is robust to general forms of measurement errors, serial dependencies and other econometric problems. A numerical illustration in the context of stock index options is offered.
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Paper provided by School of Economics and Management, University of Aarhus in its series Management Working Papers with number
1999-5.