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Bakshi, Kapadia, and Madan (2003) risk‐neutral moment estimators: An affine jump‐diffusion approach

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  • Pakorn Aschakulporn
  • Jin E. Zhang

Abstract

This is the first study of the errors in the Bakshi, Kapadia, and Madan risk‐neutral moment estimators under the Duffie, Pan, and Singleton affine jump‐diffusion model benchmarked against their true values. This is accomplished by extending the exact solutions from Zhen and Zhang. To mitigate errors in skewness, interpolating the implied volatility curve linearly and applying constant extrapolation to have a step size of $1 and strikes ranging from a quarter to quadruple the forward price should yield skewness values with errors less than 1 0 − 3, based on simulated data using parameters calibrated with the S&P 500 index during 2020.

Suggested Citation

  • Pakorn Aschakulporn & Jin E. Zhang, 2022. "Bakshi, Kapadia, and Madan (2003) risk‐neutral moment estimators: An affine jump‐diffusion approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 365-388, March.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:3:p:365-388
    DOI: 10.1002/fut.22280
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