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arXiv · 1506.06568

Nonparametric estimates of pricing functionals

Carlo Marinelli·Stefano d'Addona
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Abstract

We analyze the empirical performance of several non-parametric estimators of the pricing functional for European options, using historical put and call prices on the S&P500 during the year 2012. Two main families of estimators are considered, obtained by estimating the pricing functional directly, and by estimating the (Black-Scholes) implied volatility surface, respectively. In each case simple estimators based on linear interpolation are constructed, as well as more sophisticated ones based on smoothing kernels, à la Nadaraya-Watson. The results based on the analysis of the empirical pricing errors in an extensive out-of-sample study indicate that a simple approach based on the Black-Scholes formula coupled with linear interpolation of the volatility surface outperforms, both in accuracy and computational speed, all other methods.

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Carlo Marinelli, Stefano d'Addona. 2017-09-05. Nonparametric estimates of pricing functionals. https://arxiv.org/abs/1506.06568

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