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State price density estimation via nonparametric mixtures

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  • Ming Yuan

Abstract

We consider nonparametric estimation of the state price density encapsulated in option prices. Unlike usual density estimation problems, we only observe option prices and their corresponding strike prices rather than samples from the state price density. We propose to model the state price density directly with a nonparametric mixture and estimate it using least squares. We show that although the minimization is taken over an infinitely dimensional function space, the minimizer always admits a finite dimensional representation and can be computed efficiently. We also prove that the proposed estimate of the state price density function converges to the truth at a ``nearly parametric'' rate.

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  • Ming Yuan, 2009. "State price density estimation via nonparametric mixtures," Papers 0910.1430, arXiv.org.
  • Handle: RePEc:arx:papers:0910.1430
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    References listed on IDEAS

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    Cited by:

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    2. Xixuan Han & Boyu Wei & Hailiang Yang, 2018. "Index Options And Volatility Derivatives In A Gaussian Random Field Risk-Neutral Density Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-41, June.
    3. Fengler, Matthias R. & Hin, Lin-Yee, 2015. "Semi-nonparametric estimation of the call-option price surface under strike and time-to-expiry no-arbitrage constraints," Journal of Econometrics, Elsevier, vol. 184(2), pages 242-261.

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