Tail-Driven Nonparametric Estimation for State Price Densities

References

• Aı̈t-Sahalia Y, Duarte J (2003) Nonparametric option pricing under shape restrictions. J. Econometrics 116(1–2):9–47. Crossref, Google Scholar
• Aït‐Sahalia Y, Lo AW (1998) Nonparametric Estimation of State‐Price Densities Implicit in Financial Asset Prices. J. Finance 53(2):499–547. Crossref, Google Scholar
• Aı̈t-Sahalia Y, Lo AW (2000) Nonparametric risk management and implied risk aversion. J. Econometrics 94(1–2):9–51. Google Scholar
• Andersen LBG, Piterbarg VV (2007) Moment explosions in stochastic volatility models. Finance Stochastics 11(1):29–50.Crossref, Google Scholar
• Andersen TG, Fusari N, Todorov V (2015) Parametric inference and dynamic state recovery from option panels. Econometrica 83(3):1081–1145. Crossref, Google Scholar
• Andersen TG, Fusari N, Todorov V (2020) The pricing of tail risk and the equity premium: Evidence from international option markets. J. Bus. Econom. Statist. 38(3):662–678. Crossref, Google Scholar
• Andersen TG, Todorov V, Ubukata M (2021a) Tail risk and return predictability for the Japanese equity market. J. Econom. 222(1):344–363.Crossref, Google Scholar
• Andersen TG, Fusari N, Todorov V, Varneskov RT (2021b) Spatial dependence in option observation errors. Econom. Theory 37(2):205–247.Crossref, Google Scholar
• Artzner P, Delbaen F, Eber J-M, Heath D (1999) Coherent measures of risk. Math. Finance 9(3):203–228.Crossref, Google Scholar
• Bakshi G, Kapadia N, Madan D (2003) Stock return characteristics, skewlaws, and the differential pricing of individual equity options. Rev. Finance Stud. 16(1):101–143. Crossref, Google Scholar
• Bali TG, Murray S (2013) Does risk-neutral skewness predict the cross-section of equity option portfolio returns? J. Financial Quant. Anal. 48(4):1145–1171.Crossref, Google Scholar
• Barletta A, de Magistris PS, Violante F (2019) A non-structural investigation of VIX risk neutral density. J. Banking Finance 99:1–20.Crossref, Google Scholar
• Bates DS (1996) Jumps and stochastic volatility: Exchange rate processes implicit in deutsche mark options. Rev. Finance Stud. 9(1):69–107. Crossref, Google Scholar
• Benaim S, Friz P (2009) Regular variation and smile asymptotics. Math. Finance 19(1):1–12.Crossref, Google Scholar
• Benaim S, Friz P, Lee R (2008) On Black–Scholes implied volatility at extreme strikes. Cont R, ed. Frontiers in Quantitative Finance: Volatility and Credit Risk Modeling (John Wiley & Sons, Hoboken, NJ), 19–45.Crossref, Google Scholar
• Bick A (1990) On viable diffusion price processes of the market portfolio. J. Finance 45(2):673–689.Crossref, Google Scholar
• Birru J, Figlewski S (2012) Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008. J. Financial Markets 15(2):151–180.Crossref, Google Scholar
• Bollen NP, Whaley RE (2004) Does net buying pressure affect the shape of implied volatility functions? J. Finance 59(2):711–753.Crossref, Google Scholar
• Bollerslev TIM, Todorov V (2011) Tails, fears, and risk premia. J. Finance 66(6):2165–2211. Crossref, Google Scholar
• Bollerslev T, Todorov V, Xu L (2015) Tail risk premia and return predictability. J. Financial Econom. 118(1):113–134.Crossref, Google Scholar
• Bollerslev T, Tauchen G, Zhou H (2009) Expected stock returns and variance risk premia. Rev. Finance Stud. 22(11):4463–4492. Crossref, Google Scholar
• Bondarenko O (2003) Estimation of risk-neutral densities using positive convolution approximation. J. Econom. 116(1–2):85–112.Crossref, Google Scholar
• Boyd SP, Vandenberghe L (2004) Convex Optimization (Cambridge University Press, Cambridge, UK).Crossref, Google Scholar
• Breeden DT, Litzenberger RH (1978) Prices of state-contingent claims implicit in option prices. J. Bus. 51(4):621–651. Crossref, Google Scholar
• Brunner B, Hafner R (2003) Arbitrage-free estimation of the risk-neutral density from the implied volatility smile. J. Comput. Finance 7(1):75–106.Crossref, Google Scholar
• Carr P, Wu L (2006) A tale of two indices. J. Derivatives 13(3):13–29. Crossref, Google Scholar
• CBOE (2010) The CBOE SKEW Index—SKEW. Technical report, Chicago Board Options Exchange, Chicago, https://cdn.cboe.com/resources/indices/documents/SKEWwhitepaperjan2011.pdf.Google Scholar
• Chen RR, Hsieh PL, Huang J (2018) Crash risk and risk neutral densities. J. Empirical Finance 47:162–189.Crossref, Google Scholar
• Chen Y, Härdle W, Jeong S-O (2008) Nonparametric risk management with generalized hyperbolic distributions. J. Amer. Statist. Assoc. 103(483):910–923. Crossref, Google Scholar
• Christoffersen P, Jacobs K (2004) The importance of the loss function in option valuation. J. Financial Econom. 72(2):291–318.Crossref, Google Scholar
• Constantinides GM, Jackwerth JC, Perrakis S (2009) Mispricing of S&P 500 index options. Rev. Financial Stud. 22(3):1247–1277.Crossref, Google Scholar
• Cui Z, Kirkby JL, Nguyen D (2021) A data-driven framework for consistent financial valuation and risk measurement. Eur. J. Oper. Res. 289(1):381–398.Crossref, Google Scholar
• Dai Q, Singleton KJ (2000) Specification analysis of affine term structure models. J. Finance 55(5):1943–1978. Google Scholar
• Dennis P, Mayhew S (2002) Risk-neutral skewness: Evidence from stock options. J. Financial Quant. Anal. 37(3):471–493.Crossref, Google Scholar
• Duffie D, Pan J, Singleton KJ (2000) Transform analysis and asset pricing for affine jump-diffusions. Econometrica 68(6):1343–1376. Crossref, Google Scholar
• Dumas B, Fleming J, Whaley RE (1998) Implied volatility functions: Empirical tests. J. Finance 53(6):2059–2106. Crossref, Google Scholar
• Dykstra RL (1983) An algorithm for restricted least squares regression. J. Amer. Statist. Assoc. 78(384):837–842.Crossref, Google Scholar
• Fan J, Gijbels I (1996) Local Polynomial Modelling and Its Applications (Chapman & Hall, London).Google Scholar
• Fan J, Mancini L (2009) Option pricing with model-guided nonparametric methods. J. Amer. Statist. Soc. 104(488):1351–1372. Crossref, Google Scholar
• Fengler MR (2009) Arbitrage-free smoothing of the implied volatility surface. Quant. Finance 9(4):417–428.Crossref, Google Scholar
• Fengler MR, Hin L-Y (2015) Semi-nonparametric estimation of the call-option price surface under strike and time-to-expiry no-arbitrage constraints. J. Econom. 184(2):242–261.Crossref, Google Scholar
• Figlewski S (2010) Estimating the implied risk-neutral density for the US market portfolio. Bollerslev T, Russell J, Watson M, eds. Volatility and Time Series Econometrics: Essays in Honor of Robert Engle (Oxford University Press, Oxford, UK), 323–353.Crossref, Google Scholar
• Figlewski S (2018) Risk-neutral densities: A review. Annual Rev. Financial Econom. 10(1):329–359. Crossref, Google Scholar
• Gatheral J, Jacquier A (2014) Arbitrage-free SVI volatility surfaces. Quant. Finance 14(1):59–71.Crossref, Google Scholar
• Glasserman P, Kim K-K (2010) Moment explosions and stationary distributions in affine diffusion models. Math. Finance 20(1):1–33.Crossref, Google Scholar
• Goyal A, Saretto A (2009) Cross-section of option returns and volatility. J. Financial Econom. 94(2):310–326.Crossref, Google Scholar
• Härdle W (1990) Applied Nonparametric Regression (Cambridge University Press, Cambridge, UK).Crossref, Google Scholar
• Harrison J, Kreps DM (1979) Martingales and arbitrage in multiperiod securities markets. J. Econom. Theory 20(3):381–408. Google Scholar
• Herrmann S, Muhle-Karbe J (2017) Model uncertainty, recalibration, and the emergence of Delta–Vega hedging. Finance Stochastics 21(4):873–930.Crossref, Google Scholar
• Jackwerth JC (1999) Option implied risk-neutral distributions and implied binomial trees: A literature review. J. Derivatives 7(2):66–82.Crossref, Google Scholar
• Jackwerth JC (2004) Option-Implied Risk-Neutral Distributions and Risk Aversion (Research Foundation of AIMR (CFA Institute), Charlottesville, VA).Google Scholar
• Jarrow R, Rudd A (1982) Approximate option valuation for arbitrary stochastic processes. J. Financial Econom. 10(3):347–369. Google Scholar
• Jiang L, Wu KE, Zhou G, Zhu Y (2020) Stock return asymmetry: Beyond Skewness. J. Finance Quant. Anal. 55(2):357–386. Crossref, Google Scholar
• Keller-Ressel M (2011) Moment explosions and long-term behavior of affine stochastic volatility models. Math. Finance 21(1):73–98.Crossref, Google Scholar
• Kelly B, Jiang H (2014) Tail Risk and Asset Prices. Rev. Finance Stud. 27(10):2841–2871. Crossref, Google Scholar
• Kou S, Peng X (2016) On the measurement of economic tail risk. Oper. Res. 64(5):1056–1072.Link, Google Scholar
• Lee R (2004) The moment formula for implied volatility at extreme strikes. Math. Finance 14(3):469–480.Crossref, Google Scholar
• Li G, Zhang C (2010) On the number of state variables in options pricing. Management Sci. 56(11):2058–2075.Link, Google Scholar
• Longstaff FA (1995) Option pricing and the martingale restriction. Rev. Financial Stud. 8(4):1091–1124.Crossref, Google Scholar
• Lucas RE (1978) Asset prices in an exchange economy. Econometrica 46(6):1429–1445.Crossref, Google Scholar
• Ludwig M (2015) Robust estimation of shape-constrained state price density surfaces. J. Derivatives 22(3):56–72. Crossref, Google Scholar
• Merton RC (1976) Option pricing when underlying stock returns are discontinuous. J. Financial Econom. 3(1–2):125–144. Crossref, Google Scholar
• Monteiro AM, Tütüncü RH, Vicente LN (2008) Recovering risk-neutral probability density functions from options prices using cubic splines and ensuring nonnegativity. Eur. J. Oper. Res. 187(2):525–542.Crossref, Google Scholar
• Müller H-G, Stadtmüller U, Schmitt T (1987) Bandwidth choice and confidence intervals for derivatives of noisy data. Biometrika 74(4):743–749.Crossref, Google Scholar
• Newey WK, West KD (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3):703–708. Crossref, Google Scholar
• O’Hara M (1995) Market Microstructure Theory (Blackwell Publishers, Oxford, UK).Google Scholar
• Pan JUN, Singleton KJ (2008) Default and recovery implicit in the term structure of sovereign CDS spreads. J. Finance 63(5):2345–2384. Crossref, Google Scholar
• Racine J (2001) Bias-corrected kernel regression. J. Quant. Econom. 17(1):25–42.Google Scholar
• Rice J (1984) Boundary modification for kernel regression. Comm. Statist. Theory Methods 13(7):893–900.Crossref, Google Scholar
• Stilger PS, Kostakis A, Poon S-H (2017) What does risk-neutral skewness tell us about future stock returns? Management Sci. 63(6):1814–1834.Link, Google Scholar
• Thiele S (2020) Modeling the conditional distribution of financial returns with asymmetric tails. J. Appl. Econometrics 35(1):46–60.Crossref, Google Scholar
• Yatchew A, Härdle W (2006) Nonparametric state price density estimation using constrained least squares and the bootstrap. J. Econom. 133(2):579–599.Crossref, Google Scholar
• Yuan M (2009) State price density estimation via nonparametric mixtures. Ann. Appl. Statist. 3(3):963–984.Crossref, Google Scholar