publication . Research . Preprint . 2014

Option-implied term structures

Vogt, Erik;
Open Access English
  • Published: 01 Dec 2014
  • Publisher: New York, NY: Federal Reserve Bank of New York
Abstract
The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator around the risk-neutral valuation equation, the framework theoretically justifies (fat-tailed) extrapolations beyond truncated strikes and between observed maturities while remaining nonparametric. New confidence intervals quantify the term structure estimation error. The framework is applied to estimating the term structure of the variance risk premium and finds that a ...
Subjects
free text keywords: equity risk premium, VIX, C12, variance risk premium; term structures; options; return predictability; nonparametric regression, C14, C58, G13, G12, G17, predictability, state-price density, variance risk premium, term structures, options, sieve M estimation, finance, jel:G12, jel:C58, jel:G17, ddc:330
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publication . Research . Preprint . 2014

Option-implied term structures

Vogt, Erik;