Pricing S&P 500 Index Options: A conditional semi-nonparametric approach

2016. Journal of Futures Markets. Volume 36, Issue3, Pp 217-239

Massimo Guidolin , Erwin Hansen S

Abstract:

We price S&P 500 index options under the assumption that the conditional risk-neutral densityfunction of the index follows a Semi-Nonparametric (SNP) process with GARCH variance.The model is estimated combining a set of option contracts written on the index and the dailyindex return time series in the period 1996–2011. The in-sample and out-sample performanceof the model is compared with several benchmark models, beating most of them. We concludethat a pricing model dealing simultaneously with non-normalities and time-varying volatilityhelps to mitigate the observed S&P 500 index option biases. © 2015 Wiley Periodicals, Inc.Jrl Fut Mark

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