Nonparametric risk-neutral joint return and volatility distributions

@inproceedings{Boes2005NonparametricRJ,
title={Nonparametric risk-neutral joint return and volatility distributions},
author={M. Boes and Feike C. Drost and Bas J. M. Werker},
year={2005}
}

We propose a nonparametric technique to estimate risk-neutral volatility distributions. Our method does not need to specify a parametric risk-neutral jump-diffusion for returns and volatilities, nor do we need observations on volatility derivatives. The method uses (daily) observations on plain vanilla options only. Using S&P-500 data, we confirm a negative volatility risk premium, but find four additional results. First, the nonparametric risk-neutral volatility distribution is right-skewed… CONTINUE READING