Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25040
Authors: 
Härdle, Wolfgang Karl
Hlávka, Zdeněk
Year of Publication: 
2005
Series/Report no.: 
SFB 649 discussion paper 2005,021
Abstract: 
State price densities (SPD) are an important element in applied quantitative finance. In a Black-Scholes model they are lognormal distributions with constant volatility parameter. In practice volatility changes and the distribution deviates from log-normality. We estimate SPDs using EUREX option data on the DAX index via a nonparametric estimator of the second derivative of the (European) call price function. The estimator is constrained so as to satisfy no-arbitrage constraints and it corrects for intraday covariance structure. Given a low dimensional representation of this SPD we study its dynamic for the years 1995-2003. We calculate a prediction corridor for the DAX for a 45 day forecast. The proposed algorithm is simple, it allows calculation of future volatility and can be applied to hedging exotic options.
Subjects: 
option pricing
state price density estimation
nonlinear least squares
confidence intervals
Document Type: 
Working Paper

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