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Parametric properties of semi-nonparametric distributions, with applications to option valuation

Mencia, Javier, Leon, Angel and Sentana, Enrique (2007) Parametric properties of semi-nonparametric distributions, with applications to option valuation. Discussion paper, 597. Financial Markets Group, London School of Economics and Political Science, London, UK.

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We derive the statistical properties of the SNP densities of Gallant and Nychka (1987). We show that these densities, which are always positive, are more flexible than truncated Gram-Charlier expansions with positivity restrictions. We use the SNP densities for financial derivatives valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and analyse the semiparametric properties of our pricing model. In an Nempirical application to S&P500 index options, we compare our model to the standard and Practitioner’s Black-Scholes formulas, truncated expansions, and the Generalised Beta and Variance Gamma models.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2007 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HA Statistics
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C16 - Specific Distributions
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Identification Number: 597
Date Deposited: 16 Jul 2009 11:31

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