Matching non-synchronous observations in derivative markets: choosing windows and efficient estimators
Equilibrium and arbitrage-based option pricing models are based on the assumption that the derivative and its underlying asset are simultaneously observable. However, empirical testing with transactions data must deal with less than perfect synchronicity and windows defining a ‘match’ between the derivative and its underlying must be specified. A narrow window minimizes measurement error at the expense of a smaller sample size. The analysis in this paper assumes Poisson transaction arrivals and smooth diffusion price processes. Optimal windows and efficient estimators are derived and further evaluated by simulation. Benchmarks options are chosen using data from pit-traded S&P 500 futures options and Globex traded Euro options.
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Volume (Year): 12 (2012)
Issue (Month): 1 (September)
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