Resource title

Dynamics of state price densities

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Resource description

State price densities (SPD) are an important element in applied quantitative finance. In a Black-Scholes model they are lognormal distributions with constant volatility parameter. In practice volatility changes and the distribution deviates from log-normality. We estimate SPDs using EUREX option data on the DAX index via a nonparametric estimator of the second derivative of the (European) call price function. The estimator is constrained so as to satisfy no-arbitrage constraints and it corrects for intraday covariance structure. Given a low dimensional representation of this SPD we study its dynamic for the years 1995-2003. We calculate a prediction corridor for the DAX for a 45 day forecast. The proposed algorithm is simple, it allows calculation of future volatility and can be applied to hedging exotic options.

Resource author

Wolfgang Karl Härdle, Zdeněk Hlávka

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/25040

Resource license

Adapt according to the presented license agreement and reference the original author.