Options
Semi-nonparametric estimation of the call-option price surface under strike and time-to-expiry no-arbitrage constraints
Journal
Journal of Econometrics
ISSN
0304-4076
ISSN-Digital
1872-6895
Type
journal article
Date Issued
2015-09-02
Author(s)
Hin, Lin-Yee
Abstract
We suggest a semi-nonparametric estimator for the call-option price surface. The estimator is a bivariate tensor-product B-spline. To enforce no-arbitrage constraints across strikes and expiry dates, we establish sufficient no-arbitrage conditions on the control net of the B-spline surface. The conditions are linear and therefore allow for an implementation of the estimator by means of standard quadratic programming techniques. The consistency of the estimator is proved. By means of simulations, we explore the statistical efficiency benefits that are associated with estimating option price surfaces and state-price densities under the full set of no-arbitrage constraints. We estimate a call-option price surface, families of first-order strike derivatives, and state-price densities for S&P 500 option data.
Language
English
Keywords
option pricing function
implied volatility
no-arbitrage constraints
state price density
semi-nonparametric estimation
B-splines
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
184
Number
2
Start page
242
End page
261
Pages
20
Subject(s)
Eprints ID
207116