Characteristic Function-Based Estimation of Affine Option Pricing Models
12 Pages Posted: 14 Feb 2019
Date Written: February 4, 2019
In this paper, we derive explicit expressions for certain joint moments of stock prices and option prices within a generic affine stochastic volatility model. Evaluation of each moment requires weighted inverse Fourier transformation of a function that is determined by the risk-neutral and real-world characteristic functions of the state vector. Explicit availability of such moment expressions allows to devise a novel GMM approach to jointly estimate real-world and risk-neutral parameters of affine stochastic volatility models using observed individual option prices. Moreover, the moment expressions may be used to include option price information into other existing moment-based estimation approaches.
Keywords: Stochastic Volatility, Option Pricing, Generalized Method of Moments, Characteristic Function
JEL Classification: C32, C51, C58, G12, G13
Suggested Citation: Suggested Citation