Empirical estimation of risk-neutral density from option prices

Empirical estimation of risk-neutral density from option prices

The objective of this study is to extract the forward looking information that is embedded in option prices namely the risk-neutral density (RND). The smoothing volatility function approach is widely used by applying the proper interpolation in RND estimation. This paper presents the statistical com...

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Main Authors: Bahaludin, Hafizah, Abdullah, Mimi Hafizah
Format: Conference or Workshop Item
Language:English
Published: 2016
Subjects:
QA Mathematics
Online Access:http://irep.iium.edu.my/52364/
http://irep.iium.edu.my/52364/3/52364.pdf
id iium-52364
recordtype eprints
spelling iium-523642016-10-19T06:59:24Z http://irep.iium.edu.my/52364/ Empirical estimation of risk-neutral density from option prices Bahaludin, Hafizah Abdullah, Mimi Hafizah QA Mathematics The objective of this study is to extract the forward looking information that is embedded in option prices namely the risk-neutral density (RND). The smoothing volatility function approach is widely used by applying the proper interpolation in RND estimation. This paper presents the statistical comparison of interpolation techniques between the second and fourth order polynomials in the calculation of RND. The RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options that focus on options with a one month constant maturity. The empirical evidence shows that the interpolations of second and fourth order polynomials provide a statistical difference in RND estimation. The fourth order polynomial is the best interpolation model which yields the lowest mean square error. 2016 Conference or Workshop Item NonPeerReviewed application/pdf en http://irep.iium.edu.my/52364/3/52364.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2016) Empirical estimation of risk-neutral density from option prices. In: 37th International Conference on Quantum Probability and Related Topics (QP37) 2016, 22-26 August 2016, Kuantan, Pahang, Malaysia. (Unpublished)
repository_type Digital Repository
institution_category Local University
institution International Islamic University Malaysia
building IIUM Repository
collection Online Access
language English
topic QA Mathematics
spellingShingle QA Mathematics
Bahaludin, Hafizah
Abdullah, Mimi Hafizah
Empirical estimation of risk-neutral density from option prices
description The objective of this study is to extract the forward looking information that is embedded in option prices namely the risk-neutral density (RND). The smoothing volatility function approach is widely used by applying the proper interpolation in RND estimation. This paper presents the statistical comparison of interpolation techniques between the second and fourth order polynomials in the calculation of RND. The RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options that focus on options with a one month constant maturity. The empirical evidence shows that the interpolations of second and fourth order polynomials provide a statistical difference in RND estimation. The fourth order polynomial is the best interpolation model which yields the lowest mean square error.
format Conference or Workshop Item
author Bahaludin, Hafizah
Abdullah, Mimi Hafizah
author_facet Bahaludin, Hafizah
Abdullah, Mimi Hafizah
author_sort Bahaludin, Hafizah
title Empirical estimation of risk-neutral density from option prices
title_short Empirical estimation of risk-neutral density from option prices
title_full Empirical estimation of risk-neutral density from option prices
title_fullStr Empirical estimation of risk-neutral density from option prices
title_full_unstemmed Empirical estimation of risk-neutral density from option prices
title_sort empirical estimation of risk-neutral density from option prices
publishDate 2016
url http://irep.iium.edu.my/52364/
http://irep.iium.edu.my/52364/3/52364.pdf
first_indexed 2023-09-18T21:14:12Z
last_indexed 2023-09-18T21:14:12Z
_version_ 1777411452613689344

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