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On a robust estimation of option-implied interest rates and dividend yields

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  • Muoria Kamau
  • Ivivi J. Mwaniki

Abstract

In this paper, a simple no-arbitrage methodology to estimate option-implied interest rates and dividend yields simultaneously via a regression model is employed. Since the mean-based least squares estimation places equal weights on all data points making it sensitive to outliers, a robust median-based estimation approach is proposed. The proposed methodology is only valid for European options; consequently, an empirical analysis is conducted on options on the S & P 500 Index. Robust forward-looking model-free estimates of the risk-free interest rate and dividend yield, based exclusively on market prices of options, are thus obtained.

Suggested Citation

  • Muoria Kamau & Ivivi J. Mwaniki, 2023. "On a robust estimation of option-implied interest rates and dividend yields," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2260658-226, October.
    • Handle: RePEc:taf:oaefxx:v:11:y:2023:i:2:p:2260658
    DOI: 10.1080/23322039.2023.2260658
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