Sven Lerner (ICME): Spanning the Option Price Surface

Sven Lerner (ICME): Spanning the Option Price Surface

Authors: Sven Lerner, Markus Pelger, Xueye Ping, Damir Filapovic

Abstract: We propose a robust and flexible method for fitting the price surface of options. Our method leverages Reproducing Kernel Hilbert Spaces to learn a non-parametric modulation of a specified risk-neutral pricing measure which optimally trades off minimizing pricing errors with deviations from the specified distribution. Our method is simple to implement, and the inherent linearity of our approach enables the efficient construction of hedging portfolios. Empirically, we show that our method outperforms parametric and naive kernel smoothing approaches for pricing options out-of-sample. The implied hedging portfolios substantially outperform standard delta-hedging.