English

State price density estimation via nonparametric mixtures

Computational Finance 2009-10-12 v1 Pricing of Securities Applications

Abstract

We consider nonparametric estimation of the state price density encapsulated in option prices. Unlike usual density estimation problems, we only observe option prices and their corresponding strike prices rather than samples from the state price density. We propose to model the state price density directly with a nonparametric mixture and estimate it using least squares. We show that although the minimization is taken over an infinitely dimensional function space, the minimizer always admits a finite dimensional representation and can be computed efficiently. We also prove that the proposed estimate of the state price density function converges to the truth at a ``nearly parametric'' rate.

Cite

@article{arxiv.0910.1430,
  title  = {State price density estimation via nonparametric mixtures},
  author = {Ming Yuan},
  journal= {arXiv preprint arXiv:0910.1430},
  year   = {2009}
}

Comments

Published in at http://dx.doi.org/10.1214/09-AOAS246 the Annals of Applied Statistics (http://www.imstat.org/aoas/) by the Institute of Mathematical Statistics (http://www.imstat.org)

R2 v1 2026-06-21T13:55:38.044Z