Post, Τ., "Updating Density Estimates using Conditional Information Projection: Stock Index Returns and Stochastic Dominance Relations"

Title: "Updating Density Estimates using Conditional Information Projection: Stock Index Returns and Stochastic Dominance Relations" 
(co-authored with Stelios Arvanitis, Richard McGee)

Speaker: Professor Thierry Post, Nazarbayev University

Host:  Assistant Professor Alexopoulos Angelos, Department of Economics, Athens University of Economics and Business

Time: 15.30 -17.00

Room:  76, Patission Str., Antoniadou Wing, 3rd floor, Room A36

Attachments:  PDF of Relevant Paper

Abstract: We propose, analyze, and apply a Conditional Information Projection Density Estimator (CIPDE) that estimates latent conditional density functions by projecting a prior timeseries estimator onto distributions that satisfy a set of conditional moment conditions with functional nuisance parameters. The derivation of limit theory coupled with informationtheoretic results characterizes the estimator and its improvements over the prior estimator. Theoretically, CIPDE is shown to achieve a lower limiting relative entropy to the latent distribution, provided that the prior is inconsistent and the moment conditions are well specified. An application to stock index options is presented using conditional moment restrictions based on market prices and pricing restrictions for index options. CIPDE is shown to enhance index return density forecasts out-of-sample and improve the out-ofsample investment performance of index option strategies by better timing protective put purchases and covered call writing.