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dc.contributor.authorQu, Zhongjunen_US
dc.contributor.authorLu, Junwenen_US
dc.date.accessioned2020-12-14T19:08:44Z
dc.date.available2020-12-14T19:08:44Z
dc.date.issued2018-11-14
dc.identifier.citationZhongjun Qu, Junwen Lu. "Sieve Estimation of Option Implied State Price Density."
dc.identifier.urihttps://hdl.handle.net/2144/41800
dc.description.abstractThe state price density, as a central concept in asset pricing, embodies rich information about market expectations and risk attitudes. The paper develops a nonparametric estimator for this density using a single cross section of European option prices. The estimator has two features that di erentiate it from other methods in the literature. First, it uses information from both call and put option prices. Second, it does not require estimating any second order derivative. The estimator is characterized by the solution to a constrained and penalized linear regression. The technical analysis faces two challenges because the density is de ned by the Fredholm integral equation of the rst kind with an unbounded support, and the kernel functions are unbounded and non-di erentiable. We address these challenges by exploiting the structure of the option pricing problem. After establishing the consistency and the convergence rate of the estimator, we apply it to estimate the state price densities implied by S&P500 index options and by the VIX options. The sample periods include the recent nancial crisis and the Great Recession, during which the market turbulence imposes substantial challenges for adaptive estimation. We show that the procedure can work with both daily and high frequency observations. We also study whether quantiles of this density have predictive power for future return distributions.en_US
dc.language.isoen_US
dc.subjectState price densityen_US
dc.subjectHigh frequency dataen_US
dc.subjectInverse problemen_US
dc.subjectTikhonov regularizationen_US
dc.titleSieve estimation of option implied state price densityen_US
dc.typeArticleen_US
dc.description.versionFirst author draften_US
pubs.elements-sourcemanual-entryen_US
pubs.notesEmbargo: Not knownen_US
pubs.organisational-groupBoston Universityen_US
pubs.organisational-groupBoston University, College of Arts & Sciencesen_US
pubs.organisational-groupBoston University, College of Arts & Sciences, Department of Economicsen_US
pubs.publication-statusUnpublisheden_US
dc.identifier.mycv427686


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