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Sonderforschungsbereich 649: Ökonomisches Risiko, Humboldt-Universität Berlin >
SFB 649 Discussion Papers, HU Berlin >
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http://hdl.handle.net/10419/25040
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| Title: | | Dynamics of state price densities  |
| Authors: | | Härdle, Wolfgang Karl Hlávka, Zdeněk |
| Issue Date: | | 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 |
| Appears in Collections: | | SFB 649 Discussion Papers, HU Berlin
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