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

Mencia, Javier and 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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Identification Number: 597

Abstract

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: http://fmg.lse.ac.uk
Additional Information: © 2007 The Authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HA Statistics
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 16 Jul 2009 11:31
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/24496

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