A primary goal in modelling the implied volatility surface (IVS) for pricing and hedging aims at reducing complexity. For this purpose one fits the IVS each day and applies a principal component analysis using a functional norm. This approach, however, neglects the degenerated string structure...

This chapter deals with nonparametric estimation of the risk neutral density. We present three different approaches which do not require parametric functional assumptions on the underlying asset price dynamics nor on the distributional form of the risk neutral density. The first estimator is a...

Entropy pricing applies notions of information theory to derive the theoretical value of options. This paper employs the maximum entropy formulation of option pricing, given risk-neutral moment constraints computed directly from the observed prices. First, higher-order moments are used to...

Dimension reduction techniques for functional data analysis model and approximate smooth random functions by lower dimensional objects. In many applications the focus of interest lies not only in dimension reduction but also in the dynamic behaviour of the lower dimensional objects. The most...

The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator...

This paper presents a new formalism to price European options in all asset classes that fits the market data remarkably well. We use a model-independent representation of European Option prices as path integrals over all of the underlying asset price from inception to maturity. The no arbitrage...

This paper contributes to the literature on the estimation of the Risk Neutral Density (RND) function by modeling the prices of options for West Texas Intermediate (WTI) crude oil that were traded in the period between January 2016 and January 2017. For these series we extract the implicit RND...

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new Investor Fears index. The index suggests both large and...

We present a new generic method for constructing correlation parameterizations that are always positive definite, and derive new flexible parametric forms.Furthermore, we use the CMS spread option pricing formula from Kiesel & Lutz to calibrate a stochastic volatility LMM to caplets, swaptions...

A number of studies on the S&P 500 index options market claim that the no arbitrage assumption cannot be rejected for this market because either the martingale restriction defined in Longstaff (1995) cannot be rejected by the data, or, even when it is rejected, a large proportion of the...