We analyze the empirical performance of several non-parametric estimators of the pricing functional for European options, using historical put and call prices on the S&P500 during the year 2012. Two main families of estimators are considered, obtained by estimating the pricing functional directly, and by estimating the (Black-Scholes) implied volatility surface, respectively. In each case simple estimators based on linear interpolation are constructed, as well as more sophisticated ones based on smoothing kernels,  à la Nadaraya-Watson. The results based on the analysis of the empirical pricing errors in an extensive out-of-sample study indicate that a simple approach based on the Black-Scholes formula coupled with linear interpolation of the volatility surface outperforms, both in accuracy and computational speed, all other methods.

Marinelli, C., D'Addona, S. (2017). Nonparametric estimates of pricing functionals. JOURNAL OF EMPIRICAL FINANCE, 44, 19-35 [10.1016/j.jempfin.2017.07.005].

Nonparametric estimates of pricing functionals

D'ADDONA, STEFANO
2017-01-01

Abstract

We analyze the empirical performance of several non-parametric estimators of the pricing functional for European options, using historical put and call prices on the S&P500 during the year 2012. Two main families of estimators are considered, obtained by estimating the pricing functional directly, and by estimating the (Black-Scholes) implied volatility surface, respectively. In each case simple estimators based on linear interpolation are constructed, as well as more sophisticated ones based on smoothing kernels,  à la Nadaraya-Watson. The results based on the analysis of the empirical pricing errors in an extensive out-of-sample study indicate that a simple approach based on the Black-Scholes formula coupled with linear interpolation of the volatility surface outperforms, both in accuracy and computational speed, all other methods.
2017
Marinelli, C., D'Addona, S. (2017). Nonparametric estimates of pricing functionals. JOURNAL OF EMPIRICAL FINANCE, 44, 19-35 [10.1016/j.jempfin.2017.07.005].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11590/323543
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