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A Non-Parametric Option Pricing Model: Theory and Empirical Evidence

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Abstract

In this paper, we propose an empirically-based, non-parametric option pricing model to evaluate S&P 500 index options. Given the fact that the model is derived under the real measure, an equilibrium asset pricing model, instead of no-arbitrage, must be assumed. Using the histogram of past S&P 500 index returns, we find that most of the volatility smile documented in the literature disappears.

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Authors and Affiliations

  1. Rutgers Business School, Rutgers University, Piscataway, NJ, 08854, USA

    Ren-Raw Chen & Oded Palmon

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  1. Ren-Raw Chen
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  2. Oded Palmon
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Correspondence to Ren-Raw Chen.

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Chen, RR., Palmon, O. A Non-Parametric Option Pricing Model: Theory and Empirical Evidence. Rev Quant Finan Acc 24, 115–134 (2005). https://doi.org/10.1007/s11156-005-6333-2

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  • DOI: https://doi.org/10.1007/s11156-005-6333-2

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