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Risk‐neutral moment‐based estimation of affine option pricing models
| Content Provider | Semantic Scholar |
|---|---|
| Author | Feunou, Bruno Okou, Cédric |
| Copyright Year | 2018 |
| Abstract | This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from a panel of option prices and exploit linear relationships between risk-neutral cumulants and latent factors within the continuous time affine stochastic volatility framework. We find that fitting the Andersen, Fusari, and Todorov (2015b) option valuation model to risk-neutral moments captures the bulk of the information in option prices. Our estimation strategy is effective, easy to implement, and robust, as it allows for a direct linear filtering of the latent factors and a quasi-maximum likelihood estimation of model parameters. From a practical perspective, employing risk-neutral moments instead of option prices also helps circumvent several sources of numerical errors and substantially lessens the computational burden inherent in working with a large panel of option contracts. |
| Starting Page | 1007 |
| Ending Page | 1025 |
| Page Count | 19 |
| File Format | PDF HTM / HTML |
| DOI | 10.1002/jae.2630 |
| Volume Number | 33 |
| Alternate Webpage(s) | https://www.bankofcanada.ca/wp-content/uploads/2017/12/swp2017-55.pdf |
| Alternate Webpage(s) | https://doi.org/10.1002/jae.2630 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
