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Pricing with Splines

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  • Christian Gouriéroux
  • Alain Monfort

Abstract

The exponential affine pricing principle is applied to the family of skewed Laplace historical distributions. The risk-neutral distribution is shown to belong to the same family and a closed form pricing formula for a European call is derived. This formula is a direct competitor of the Black-Scholes formula, but involves more parameters, that are location and tail parameters. This approach is extended to exponential affine spline conditional probability density function and stochastic discount factor leading to nonparametric pricing approaches. Finally the time coherency is introduced by means of a Markov specification.

Suggested Citation

  • Christian Gouriéroux & Alain Monfort, 2006. "Pricing with Splines," Annals of Economics and Statistics, GENES, issue 82, pages 3-33.
    • Handle: RePEc:adr:anecst:y:2006:i:82:p:3-33
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    File URL: http://www.jstor.org/stable/20079149
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    Cited by:

    1. Holly, Alberto & Monfort, Alain & Rockinger, Michael, 2011. "Fourth order pseudo maximum likelihood methods," Journal of Econometrics, Elsevier, vol. 162(2), pages 278-293, June.
    2. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (I): methodology," Documents de travail du Centre d'Economie de la Sorbonne b08037, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology," Post-Print halshs-00281585, HAL.
    4. Gourieroux, C. & Monfort, A., 2007. "Econometric specification of stochastic discount factor models," Journal of Econometrics, Elsevier, vol. 136(2), pages 509-530, February.

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