Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/100704 
Year of Publication: 
1996
Series/Report no.: 
Working Paper No. 96-5
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
This paper expands and tests the approach of Madan and Milne (1994) for pricing contingent claims as elements of a separable Hilbert space. We specialize the Hilbert space basis to the family of Hermite polynomials and use the model to price options on Eurodollar futures. Restrictions on the prices of Hermite polynomial risk for contingent claims with different times to maturity are derived. These restrictions are rejected by our empirical tests of a four-parameter model. The unrestricted results indicate skewness and excess kurtosis in the implied risk-neutral density. These characteristics of the density are also mirrored in the statistical density estimated from a time series on LIBOR. The out-of-sample performance of the four-parameter model is consistently better than that of a two-parameter version of the model.
Subjects: 
Euro-dollar market
Financial markets
Futures
Document Type: 
Working Paper

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