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On the number of state variables in options pricing in Management science, Vol. 56 N° 11 (Novembre 2010)
On the number of state variables in options pricing [texte imprimé] / Gang Li, Auteur ; Chu Zhang, Auteur . - 2011 . - pp. 2058-2075.
Management
Langues : Anglais (eng)
in Management science > Vol. 56 N° 11 (Novembre 2010) . - pp. 2058-2075
Mots-clés : Options pricing State variables Nonparametric method Nonlinear principal component analysis Index. décimale : 658 Organisation des entreprises. Techniques du commerce Résumé : n this paper, we investigate the methodological issue of determining the number of state variables required for options pricing. After showing the inadequacy of the principal component analysis approach, which is commonly used in the literature, we adopt a nonparametric regression technique with nonlinear principal components extracted from the implied volatilities of various moneyness and maturities as proxies for the transformed state variables. The methodology is applied to the prices of S&P 500 index options from the period 1996–2005. We find that, in addition to the index value itself, two state variables, approximated by the first two nonlinear principal components, are adequate for pricing the index options and fitting the data in both time series and cross sections. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/cgi/content/abstract/56/11/2058
