An Empirical Study of Stock and American Option Prices

47 Pages Posted: 31 Aug 2011 Last revised: 21 Sep 2011

See all articles by Diego Ronchetti

Diego Ronchetti

University of Groningen - SOM Research School

Date Written: August 1, 2011


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.

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, G14

Suggested Citation

Ronchetti, Diego, An Empirical Study of Stock and American Option Prices (August 1, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: or

Diego Ronchetti (Contact Author)

University of Groningen - SOM Research School ( email )

P.O. Box 800
9700 AV Groningen
+31 50 363 3460 (Phone)
+31 50 363 7337 (Fax)


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