State Price Density Estimation and Nonparametric Pricing of Basket Options

Abstract Both large oil price increases and decreases are associated with deteriorating economic conditions. The projection of the state price density (SPD) onto oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because investors assign high state prices to large negative and large positive oil returns, the U-shaped SPD may steepen in either tail when economic conditions deteriorate. The positive return region of the SPD is more closely related to economic conditions. The oil SPD contains information about economic conditions and future security returns that is distinct from the information in the stock index SPD.

Download Full-text

Nonparametric Estimation of Fractional Option Pricing Model

Mathematical Problems in Engineering ◽

10.1155/2020/8858821 ◽

2020 ◽

Vol 2020 ◽

pp. 1-8

Author(s):

Qing Li ◽

Songlin Liu ◽

Misi Zhou

Keyword(s):

Option Pricing ◽

Stock Exchange ◽

Option Price ◽

Integral Function ◽

The State ◽

Pricing Model ◽

State Price ◽

Black Scholes ◽

Option Pricing Model ◽

State Price Density

The establishment of the fractional Black–Scholes option pricing model is under a major condition with the normal distribution for the state price density (SPD) function. However, the fractional Brownian motion is deemed to not be martingale with a long memory effect of the underlying asset, so that the estimation of the state price density (SPD) function is far from simple. This paper proposes a convenient approach to get the fractional option pricing model by changing variables. Further, the option price is transformed as the integral function of the cumulative density function (CDF), so it is not necessary to estimate the distribution function individually by complex approaches. Finally, it encourages to estimate the fractional option pricing model by the way of nonparametric regression and makes empirical analysis with the traded 50 ETF option data in Shanghai Stock Exchange (SSE).

Download Full-text

State price density analysis of equity market volatility: Tools for fund managers

10.14264/uql.2014.166 ◽

2014 ◽

Author(s):

Michael O'Neill

Keyword(s):

Equity Market ◽

Market Volatility ◽

Fund Managers ◽

State Price ◽

Density Analysis ◽

State Price Density

Download Full-text

Two Trees with Heterogeneous Beliefs: Spillover Effect of Disagreement

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018001266 ◽

2018 ◽

Vol 54 (4) ◽

pp. 1791-1819 ◽

Cited By ~ 2

Author(s):

Bing Han ◽

Lei Lu ◽

Yi Zhou

Keyword(s):

Model Prediction ◽

Large Firm ◽

Spillover Effect ◽

The State ◽

Heterogeneous Beliefs ◽

The Novel ◽

State Price ◽

State Price Density ◽

Novel Model

In a model where investors disagree about the fundamentals of two stocks, the state-price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors. The pricing effects of investor disagreements crucially depend on the average belief biases. Empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature.

Download Full-text