Research

We extensively investigate the empirical performance of approximate pricing formulas for European options based on approximating the logarithmic return’s density of the underlying by a linear combination of rescaled Hermite polynomials.  Empirical results suggest that such approximate pricing formulas, when compared with simple nonparametric estimates based on interpolation and extrapolation on the implied volatility curve, perform reasonably well only for options with strike price not too far apart from the strike prices of the observed sample.