Constrained General Regression in Pseudo-Sobolev Spaces with Application to Option Pricing
State price density (SPD) contains important information concerning market expectations. In existing literature, a constrained estimator of the SPD is found by nonlinear least squares in a suitable Sobolev space. We improve the behavior of this estimator by implementing a covariance structure taking into account the time of the trade and by considering simultaneously both the observed Put and Call option prices.
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