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. Financial Markets Group Discussion Papers (597). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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:	https://www.fmg.ac.uk/
Additional Information:	© 2007 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HA Statistics
JEL classification:	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
Date Deposited:	16 Jul 2009 11:31
Last Modified:	13 Sep 2024 20:04
URI:	http://eprints.lse.ac.uk/id/eprint/24496

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