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Estimating Parametric Models of Probability Distributions

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Abstract

Noting that risk neutral distributions are estimated by minimizing the squared deviations between market and model option prices we consider using option payoff moments in estimating distributional parameters from a sample of observations. It is observed, in particular when compared to maximum likelihood estimation, that digital option payoff moments yield the lowest chisquare statistics for a test of uniformity for data transformed to the unit interval by the estimated distribution function.

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Authors and Affiliations

  1. Robert H. Smith School of Business, University of Maryland, College Park, MD, 20742, USA

    Dilip B. Madan

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  1. Dilip B. Madan
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Correspondence to Dilip B. Madan.

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Madan, D.B. Estimating Parametric Models of Probability Distributions. Methodol Comput Appl Probab 17, 823–831 (2015). https://doi.org/10.1007/s11009-014-9409-4

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  • DOI: https://doi.org/10.1007/s11009-014-9409-4

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