A study towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation

Journal of Financial Economics

Volumn 56, Issue 3, 2000, Pages 407-458

  Chernov, Mikhail ^a   Ghysels, Eric ^b,c  

^a The Sanford C Bernstein Co Center for Leadership and Ethics   (United States)

^b PENNSYLVANIA STATE UNIVERSITY   (United States)

^c UNIVERSITY OF NORTH CAROLINA   (United States)

Author keywords

C14; C52; C53; Derivative securities; Efficient method of moments; Filtering; G13; State price densities; Stochastic volatility models

Indexed keywords

EID: 0034196104     PISSN: 0304405X     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0304-405X(00)00046-5     Document Type: Article

References (61)

1. Aït-Sahalia Y., Lo A. Nonparametric estimation of state-price densities implicit in financial prices. Journal of Finance. 53:1998;499-548.
2. Ait-Sahalia, Y., Wang, Y., Yared, F., 1997. Do options markets correctly price the probabilities of movements of the underlying asset? Unpublished discussion paper. University of Chicago, IL.
3. Andersen T.G., Chung H.-J., Sørensen B.E. Efficient method of moments estimation of a stochastic volatility model: a Monte Carlo study. Journal of Econometrics. 91:1999;61-87.
4. Andersen, T.G., Lund, J., 1996. The short rate diffusion revisited: an investigation guided by the efficient method of moments. Unpublished discussion paper, Northwestern University, Evanston, IL.
5. Andersen T.G., Lund J. Estimating continuous-time stochastic volatility models of the short-term interest rate. Journal of Econometrics. 77:1997;343-377.
6. Backus, D., Foresi, S., Li, K., Wu, L., 1997. Accounting for biases in Black-Scholes. Unpublished discussion paper, New York University.
7. Bakshi G., Cao C., Chen Z. Empirical performance of alternative option pricing models. Journal of Finance. 52:1997;2003-2049.
8. Bakshi, G., Madan, D., 2000. Spanning and derivative-security valuation. Journal of Financial Economics 55.
9. Bates D.S. Testing option pricing models. Maddala G.S., Rao C.R. Handbook of Statistics. Vol. 14:1996;Elsevier, Amsterdam.
10. Bollerslev T. Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics. 31:1986;307-327.
11. Broadie, M., Detemple, J., Ghysels, E., Tòrres, O., 1997. American options with stochastic volatility and dividends: a nonparametric approach. Journal of Econometrics, forthcoming.
12. Campbell J., Lo A., MacKinlay C. The Econometrics of Financial Markets. 1997;Princeton University Press, Princeton, NJ.
13. Canina L., Figlewski S. The informational content of implied volatility. Review of Financial Studies. 6:1993;659-681.
14. Comte, F., Renault, E., 1995. Long memory continuous time stochastic volatility models. Paper presented at the HFDF-I Conference, Zurich.
15. Cox J., Ingersoll J., Ross S. A theory of the term structure of interest rates. Econometrica. 53:1985;385-408.
16. Christensen B.J., Prabhala N.R. The relation between implied and realized volatility. Journal of Financial Economics. 50:1998;125-150.
17. Das S., Sundaram R. Of smiles and smirks: a term-structure perspective. Journal of Financial and Quantitative Analysis. 34:1999;211-240.
18. Day T., Lewis C. Stock market volatility and the information content of stock index options. Journal of Econometrics. 52:1992;267-287.
19. Duan J.C. The GARCH option pricing model. Mathematical Finance. 5:1995;13-32.
20. Duan J.C., Simonato J.G. Empirical martingale simulation for asset prices. Management Science. 44:1998;1218-1233.
21. Duffie, D., Pan, J., Singleton, K., 1998. Transform analysis and option pricing for affine jump-diffusions. Econometrica, forthcoming.
22. Dumas B., Fleming J., Whaley R.E. Implied volatility functions: empirical tests. Journal of Finance. 53:1998;2059-2106.
23. Figlewski, S., 1998. Derivatives risks, old and new. Wharton-Brookings Papers on Financial Services I.
24. Fleming J. The quality of market volatility forecasts implied by S&P 100 index option prices. Journal of Empirical Finance. 5:1998;317-345.
25. Gallant A.R., Hsieh D., Tauchen G. Estimation of stochastic volatility models with diagnostics. Journal of Econometrics. 81:1997;159-192.
26. Gallant, A.R., Hsu, C.-T., Tauchen, G., 1999. Using daily range data to calibrate volatility diffusions and extract the forward integrated variance, Review of Economics and Statistics, forthcoming.
27. Gallant A.R., Long J.R. Estimating stochastic differential equations efficiently by minimum chi-square. Biometrika. 84:1997;125-141.
28. Gallant A.R., Tauchen G. Seminonparametric estimation of conditionally constrained heterogeneous processes: asset pricing applications. Econometrica. 57:1989;1091-1120.
29. Gallant, A.R., Tauchen, G., 1993. SNP: A program for nonparametric time series analysis. Version 8.3, User's Guide. University of North Carolina, Chapel Hill, unpublished discussion paper.
30. Gallant A.R., Tauchen G. Which moments to match? Econometric Theory. 12:1996;657-681.
31. Gallant A.R., Tauchen G. EMM: A program for Efficient Method of Moments estimation. Version 1.4, User's guide. Unpublished discussion paper. 1997;Duke University, Durham, NC.
32. Gallant A.R., Tauchen G. Reprojecting partially observed systems with application to interest rate diffusions. Journal of American Statistical Association. 93:1998;10-24.
33. Ghysels E., Harvey A., Renault E. Stochastic volatility. Maddala G.S., Rao C.R. Handbook of Statistics. Vol. 14:1996;Elsevier, Amsterdam.
34. Ghysels, E., Jasiak, J., 1996. Stochastic volatility and time deformation. Unpublished discussion paper, Centre interuniversitaire de recherche en analyse des organisations (CIRANO), Montreal.
35. Hansen L. Large sample properties of generalized method of moments estimators. Econometrica. 50:1982;1029-1054.
36. Hansen L., Scheinkman J. Back to the future: generating moment implications for continuous-time Markov processes. Econometrica. 63:1995;767-804.
37. Harrison M., Kreps D. Martingales and arbitrage in multiperiod securities markets. Journal of Economic Theory. 20:1979;381-408.
38. Harrison M., Pliska S. Martingales and stochastic integrals in the theory of continuous trading. Stochastic Processes and Their Applications. 11:1981;215-260.
39. Harvey, A.C., 1993. Long memory in stochastic volatility. Unpublished discussion paper. London School of Economics.
40. Harvey A.C., Ruiz E., Shephard N. Multivariate stochastic variance models. Review of Economic Studies. 61:1994;247-264.
41. Harvey C.R., Whaley R.E. S&P 100 index option volatility. Journal of Finance. 46:1991;1551-1561.
42. Heston S.L. A closed-form solution for options with stochastic volatility with applications to bond and currency options. Review of Financial Studies. 6:1993;327-343.
43. Hull J., White A. The pricing of options on assets with stochastic volatilities. Journal of Finance. 42:1987;281-300.
44. Jacquier, E., Jarrow, R., 1998. Model error in contingent claim models: dynamic evaluation. Journal of Econometrics forthcoming.
45. Jacquier E., Polson N.G., Rossi P.E. Bayesian analysis of stochastic volatility models (with discussion). Journal of Business and Economic Statistics. 12:1994;371-417.
46. Jacquier, E., Polson, N.G., Rossi, P.E., 1995. Stochastic volatility: univariate and multivariate extensions. Unpublished discussion paper, Boston College.
47. Jiang, G., van der Sluis, P., 1998. Pricing stock options under stochastic volatility and interest rates with efficient method of moments estimation. Unpublished discussion paper, University of Groningen, Netherlands.
48. Kloeden P.E., Platen E. Numerical Solution of Stochastic Differential Equations. 1995;Springer, New York, NY.
49. Lamoureux C.G., Lastrapes W.D. Forecasting stock-return variance: toward an understanding of stochastic implied volatilities. Review of Financial Studies. 6:1993;293-326.
50. Melino A. Estimation of continuous-time models in finance. Sims C.A. Advances in Econometrics. 1994;Cambridge University Press, Cambridge.
51. Nandi S. How important is the correlation between returns and volatility in a stochastic volatility model? Emprical evidence from pricing and hedging in the S&P 500 index options market. Journal of Banking and Finance. 22:1998;589-610.
52. Nelson D.B., Foster D.P. Asymptotic filtering theory for univariate ARCH models. Econometrica. 62:1994;1-41.
53. Nelson D.B. Asymptotic filtering theory for multivariate ARCH models. Journal of Econometrics. 62:1996;1-41.
54. Pastorello, S., Renault, E., Touzi, N., 1994. Statistical inference for random variance option pricing. Jornal of Business and Economic Statistics, forthcoming.
55. Renault E. Econometric models of option pricing errors. Kreps D.M., Wallis K.F. Advances in Economics and Econometrics: Theory and Applications. Seventh World Congress. Vol. 3:1997;Cambridge University Press, Cambridge.
56. Romano M., Touzi N. Contingent claims and market completeness in a stochastic volatility model. Mathematical Finance. 7:1997;399-412.
57. Rubinstein M. Implied binomial trees. Journal of Finance. 49:1994;771-818.
58. Rydberg T.H. A note on the existence of unique equivalent martingale measures in a Markovian setting. Finance and Stochastics. 1:1997;251-257.
59. Scott L. Option pricing when the variance changes randomly: theory, estimation, and an application. Journal of Financial and Quantitative Analysis. 22:1987;419-438.
60. Tauchen G. New minimum chi-square methods in empirical finance. Kreps D.M., Wallis K.F. Advances in Economics and Econometrics: Theory and Applications. Seventh World Congress. Vol. 3:1997;Cambridge University Press, Cambridge.
61. Wiggins J.B. Option values under stochastic volatility: theory and empirical estimates. Journal of Financial Economics. 19:1987;351-372.