Spatial Dependence in Option Observation Errors

Torben G. Andersen*, Nicola Fusari, Viktor Todorov, Rasmus T. Varneskov

*Corresponding author af dette arbejde

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Abstrakt

In this paper, we develop the first formal nonparametric test for whether the observation errors in option panels display spatial dependence. The panel consists of options with different strikes and tenors written on a given underlying asset. The asymptotic design is of the infill type - the mesh of the strike grid for the observed options shrinks asymptotically to zero, while the set of observation times and tenors for the option panel remains fixed. We propose a Portmanteau test for the null hypothesis of no spatial autocorrelation in the observation error. The test makes use of the smoothness of the true (unobserved) option price as a function of its strike and is robust to the presence of heteroskedasticity of unknown form in the observation error. A Monte Carlo study shows good finite-sample properties of the developed testing procedure and an empirical application to S&P 500 index option data reveals mild spatial dependence in the observation error, which has been declining in recent years.
OriginalsprogEngelsk
TidsskriftEconometric Theory
Vol/bind37
Udgave nummer2
Sider (fra-til)205-247
Antal sider43
ISSN0266-4666
DOI
StatusUdgivet - apr. 2021

Bibliografisk note

Published online: 13. April 2020

Emneord

  • Null hypothesis
  • Heteroscedasticity

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