I am trying to reproduce the results of the paper Bond Variance Risk Premiums. In the online appendix A they noted their metholodology. I have a data set of American future and option prices on these futures and I want to transform them into European forward prices. Based on that my questions:

How do I calibrate the market price of risk in step 2? I would try to do a golden section search with a formula like min [real-option-prices - theoretical-option-prices-calculated-with-the-market-price-of-risk-as-variable]. Is there such a closed form formula with the market price of risk as variable or how do I get the market price of risk out of option data?


Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.