TITLE:
State Price Density Estimation and Nonparametric Pricing of Basket Options
AUTHORS:
Yuming Kuang, Tze Leung Lai
KEYWORDS:
Basket Options, Portfolio Weights, Joint State Price Density
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.5,
November
30,
2015
ABSTRACT: This paper develops a novel method to price basket options by using an application-driven approach to estimating the state price density of the basket or the joint state price density of the asset prices in the basket. In this connection, we also discuss the difference between the application-driven and the traditional statistical approach to density estimation.