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Activity Number: 508 - Forecasting and Modeling Financial Volatility
Type: Contributed
Date/Time: Wednesday, July 31, 2019 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract #302920
Title: Estimation of Model-Free Implied Variance
Author(s): Shuang Zhang* and Song Xi Chen and Lei Lu
Companies: Peking University and Peking University and University of Manitoba
Keywords: Option; Pricing error; Implied variance; Kernel smoothing; Model-free
Abstract:

We consider consistent estimation of the model-free implied variance by eliminating the observed option pricing errors. It is demonstrated that the price errors in the option prices, if not properly removed, can cause the implied variance estimator biased and thus renders its consistency. A consistent estimator of implied variance is proposed via a kernel smoothing of the option price function. We theoretically and numerically show that the approach moves the adverse impact of the pricing errors and produces a consistent estimator. Using ETF 50 option data, we investigate the historical behavior of model-free implied volatility in China.


Authors who are presenting talks have a * after their name.

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