Affine Term Structure of Risk-Neutral Moments Models

39 Pages Posted: 16 Aug 2015 Last revised: 13 Dec 2016

Bruno Feunou

Bank of Canada

Cedric Okou

University of Quebec at Montreal (UQAM)

Date Written: September 1, 2016


This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from the term structure of option prices and exploit linear relationships between risk-neutral moments and latent factors within the continuous time affine stochastic volatility framework. We find that fitting option valuation models to risk-neutral moments (variance, skewness, and kurtosis) captures a sizable fraction of the information in option prices. The information loss from option prices to risk-neutral moments is more pronounced in the left tail of the distribution. The procedure also offers guidance on the components of stochastic volatility models that allow a replication of the salient features observed in the term structure of risk-neutral moments. From a practical perspective, employing risk-neutral moments instead of option prices also helps circumvent the challenge inherent in working with a large set of option contracts.

Keywords: Risk-neutral moments, Affine term structure, Stochastic volatility models, Latent factors

JEL Classification: G12

Suggested Citation

Feunou, Bruno and Okou, Cedric, Affine Term Structure of Risk-Neutral Moments Models (September 1, 2016). Available at SSRN: or

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
613-782-8302 (Phone)


Cedric Okou (Contact Author)

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
514-987-3000 Ext. 5521 (Phone)

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