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Nonparametric methods and option pricing

Author

Listed:
  • GHYSELS, Eric

    (Pennsylvania State University and CIRANO)

  • PATILEA, Valentin

    (Institut de Statistique, Université catholique de Louvain, Louvain-la-Neuve, Belgium)

  • RENAULT, Eric

    (GREMAQ and IDEI, Université des Sciences Sociales de Toulouse and Institut Universitaire de France)

  • TORRES, Olivier

    (GREMARS, Université de Lille 3)

Abstract

In this paper, we survey some of the recent nonparametric estimation methods which were developed to price derivative contracts. We focus on equity options and start with a so-called model-free approach which involves very little financial theory. Next we discuss nonparametric and semi-parametric methods of option pricing and illustrate the different approaches.

Suggested Citation

  • GHYSELS, Eric & PATILEA, Valentin & RENAULT, Eric & TORRES, Olivier, 1997. "Nonparametric methods and option pricing," LIDAM Discussion Papers CORE 1997075, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:1997075
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    References listed on IDEAS

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    1. Yacine Aït-Sahalia & Andrew W. Lo, "undated". "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," CRSP working papers 332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    12. Broadie, Mark & Detemple, Jerome & Ghysels, Eric & Torres, Olivier, 2000. "Nonparametric estimation of American options' exercise boundaries and call prices," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1829-1857, October.
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    Cited by:

    1. Henri Bertholon & Alain Monfort & Fulvio Pegoraro, 2006. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working Papers 2006-28, Center for Research in Economics and Statistics.
    2. Karl Härdle, Wolfgang & López-Cabrera, Brenda & Teng, Huei-Wen, 2015. "State price densities implied from weather derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 106-125.
    3. Ramazan Gencay & Aslihan Salih, 2003. "Degree of Mispricing with the Black-Scholes Model and Nonparametric Cures," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 73-101, May.
    4. Garcia, Rene & Gencay, Ramazan, 2000. "Pricing and hedging derivative securities with neural networks and a homogeneity hint," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 93-115.
    5. René Garcia & Eric Ghysels & Eric Renault, 2004. "The Econometrics of Option Pricing," CIRANO Working Papers 2004s-04, CIRANO.
    6. Yatchew, Adonis & Hardle, Wolfgang, 2006. "Nonparametric state price density estimation using constrained least squares and the bootstrap," Journal of Econometrics, Elsevier, vol. 133(2), pages 579-599, August.

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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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