Dynamic Semiparametric Factor Models in Risk Neutral Density Estimation

SFB 649 Discussion Paper 2008-038

19 Pages Posted: 9 Jan 2017  

Enzo Giacomini

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Volker Kratschmer

Berlin University of Technology

Date Written: May 19, 2008

Abstract

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 prominent dimension reduction technique - functional principal components analysis - however, does not model time dependences embedded in functional data. In this paper we use dynamic semiparametric factor models (DSFM) to reduce dimensionality and analyse the dynamic structure of unknown random functions by means of inference based on their lower dimensional representation. We apply DSFM to estimate the dynamic structure of risk neutral densities implied by prices of option on the DAX stock index.

Keywords: dynamic factor models, dimension reduction, risk neutral density

JEL Classification: C14, C32, G12

Suggested Citation

Giacomini, Enzo and Härdle, Wolfgang K. and Kratschmer, Volker, Dynamic Semiparametric Factor Models in Risk Neutral Density Estimation (May 19, 2008). SFB 649 Discussion Paper 2008-038. Available at SSRN: https://ssrn.com/abstract=2894283

Enzo Giacomini

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE) ( email )

Spandauer Strasse 1
Berlin, D-10178
Germany

Wolfgang K. Härdle (Contact Author)

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany
+49 30 2093 5631 (Phone)
+49 30 2093 5649 (Fax)

Volker Kratschmer

Berlin University of Technology ( email )

Berlin
Germany

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