An Application of Bootstrapping in Option Pricing
Athens University of Economics and Business, MSL Working Paper
33 Pages Posted: 8 Feb 2005 Last revised: 2 Nov 2008
Date Written: October 31, 2008
This paper explores the use of statistical bootstrapping in inferring the finite-sample distribution of option prices when an estimate is used in place of the true but unknown variance. The procedure can be easily adapted to infer the distribution of many useful nonlinear estimators, such as hedge ratios, even in the absence of analytical option pricing formulas. In an empirical application using S&P 500 data, we study the distribution of European and American option prices and deltas using bootstrapping and compare the results to those given by large sample theory. We also explore behaviour of these distributions when we shift volatility levels, maturities, risk-free rates and dividend yields.
Keywords: Option Pricing, Bootstrapping, Asymptotic Theory, Estimation Risk, American Options
JEL Classification: G13, C14, C10
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