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Staff Reports
Option-Implied Term Structures
December
2014 Number 706
Revised January 2016
Revised January 2016
JEL classification: G12, G17, C58
This paper proposes a nonparametric sieve regression framework for pricing the term structure of option spanning portfolios. The framework delivers closed-form, nonparametric option pricing and hedging formulas through basis function expansions that grow with the sample size. Novel confidence intervals quantify term structure estimation uncertainty. The framework is applied to estimating the term structure of variance risk premia and finds that a short-run component dominates market excess return predictability. This finding is inconsistent with existing asset pricing models that seek to explain the variance risk premium’s predictive content.
66 pages / 1,575 kbTools
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