An Empirical Study of Stock and American Option Prices
Columbia University - Columbia Business School; University of Lugano
August 1, 2011
Midwest Finance Association 2012 Annual Meetings Paper
This paper describes an empirical study of the information content of daily share prices and American put and call option mid-quotes about their generating process. Considering stock return and its volatility as the risk factors and without parameterizing their historical joint dynamics, two results are empirically obtained. First, share prices and option mid-quotes are both necessary to identify at the same time the discount for uncertain stock return and return variance in the asset price formation. Second, constraining the nonparametric estimation procedure of the historical joint dynamics of the risk factors to satisfy an arbitrage-free pricing model is useful to get more stable estimates over time. As an illustration, time series of different estimates of historical conditional correlation of the risk factors, Sharpe ratio of an investment on the stock, return skewness and kurtosis are reported.
Number of Pages in PDF File: 47
Keywords: American option, equity risk, volatility risk, leverage effect, Sharpe ratio, skewness and kurtosis, nonparametric estimation, model calibration, Generalized Method of Moments, Extended Method of Moments
JEL Classification: C14, C52, G13, G14working papers series
Date posted: August 31, 2011 ; Last revised: September 21, 2011
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