Walker, Todd B and Haley, M. Ryan (2009): Alternative Tilts for Nonparametric Option Pricing.

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Abstract
This paper generalizes the nonparametric approach to option pricing of Stutzer (1996) by demonstrating that the canonical valuation methodology in troduced therein is one member of the CressieRead family of divergence mea sures. While the limiting distribution of the alternative measures is identical to the canonical measure, the finite sample properties are quite different. We assess the ability of the alternative divergence measures to price European call options by approximating the riskneutral, equivalent martingale measure from an empirical distribution of the underlying asset. A simulation study of the finite sample properties of the alternative measure changes reveals that the optimal divergence measure depends upon how accurately the empirical distri bution of the underlying asset is estimated. In a simple BlackScholes model, the optimal measure change is contingent upon the number of outliers observed, whereas the optimal measure change is a function of time to expiration in the stochastic volatility model of Heston (1993). Our extension of Stutzer’s tech nique preserves the clean analytic structure of imposing moment restrictions to price options, yet demonstrates that the nonparametric approach is even more general in pricing options than originally believed.
Item Type:  MPRA Paper 

Original Title:  Alternative Tilts for Nonparametric Option Pricing 
Language:  English 
Keywords:  Option Pricing, Nonparametric, Entropy 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C14  Semiparametric and Nonparametric Methods: General G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  17140 
Depositing User:  Todd B Walker 
Date Deposited:  06. Sep 2009 19:30 
Last Modified:  20. Feb 2013 07:07 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/17140 