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Consistent Estimation of Pricing Kernels from Noisy Price Data

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  • Vladislav Kargin

Abstract

If pricing kernels are assumed non-negative then the inverse problem of finding the pricing kernel is well-posed. The constrained least squares method provides a consistent estimate of the pricing kernel. When the data are limited, a new method is suggested: relaxed maximization of the relative entropy. This estimator is also consistent. Keywords: $\epsilon$-entropy, non-parametric estimation, pricing kernel, inverse problems.

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Paper provided by arXiv.org in its series Papers with number math/0310223.

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Date of creation: Oct 2003
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Handle: RePEc:arx:papers:math/0310223

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  12. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
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