## A Study towards a Unified Approach to the Joint Estimation of Objective and Risk Neutral Measures for the Purpose of Options Valuation (1999)

Citations: | 89 - 4 self |

### BibTeX

@MISC{Chernov99astudy,

author = {Mikhail Chernov and Eric Ghysels and Roger Lee and Especially Ron Gallant and Insightful Discussions We},

title = {A Study towards a Unified Approach to the Joint Estimation of Objective and Risk Neutral Measures for the Purpose of Options Valuation},

year = {1999}

}

### Years of Citing Articles

### OpenURL

### Abstract

The purpose of this paper is to bridge two strands of the literature, one pertaining to the objectiveorphysical measure used to model the underlying asset and the other pertaining to the risk-neutral measure used to price derivatives. We propose a generic procedure using simultaneously the fundamental price S t and a set of option contracts ### I it # i=1;m # where m # 1 and # I it is the Black-Scholes implied volatility.We use Heston's #1993# model as an example and appraise univariate and multivariate estimation of the model in terms of pricing and hedging performance. Our results, based on the S&P 500 index contract, show that the univariate approach only involving options by and large dominates. Aby-product of this #nding is that we uncover a remarkably simple volatility extraction #lter based on a polynomial lag structure of implied volatilities. The bivariate approachinvolving both the fundamental and an option appears useful when the information from the cash market ...