Estimation of option-implied risk-neutral into real-world density by using calibration function

Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is applie...

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Main Authors:	Bahaludin, Hafizah, Abdullah, Mimi Hafizah
Format:	Conference or Workshop Item
Language:	English English
Published:	2016
Subjects:	QA Mathematics
Online Access:	http://irep.iium.edu.my/54103/ http://irep.iium.edu.my/54103/ http://irep.iium.edu.my/54103/1/icms4%20full%20paper.pdf http://irep.iium.edu.my/54103/2/icsm4%20abstract%20n%20schedule.pdf

id	iium-54103
recordtype	eprints
spelling	iium-541032018-05-22T00:22:29Z http://irep.iium.edu.my/54103/ Estimation of option-implied risk-neutral into real-world density by using calibration function Bahaludin, Hafizah Abdullah, Mimi Hafizah QA Mathematics Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is applied by using a fourth order polynomial interpolation to obtain the RNDs. Then, a calibration function is used to convert the RNDs into RWDs. There are two types of calibration function which are parametric and non-parametric calibrations. The density is extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity from January 2009 until December 2015. The performance of RNDs and RWDs extracted are evaluated by using a density forecasting test. This study found out that the RWDs obtain can provide an accurate information regarding the price of the underlying asset in future compared to that of the RNDs. In addition, empirical evidence suggests that RWDs from a non-parametric calibration has a better accuracy than other densities. 2016-11-15 Conference or Workshop Item NonPeerReviewed application/pdf en http://irep.iium.edu.my/54103/1/icms4%20full%20paper.pdf application/pdf en http://irep.iium.edu.my/54103/2/icsm4%20abstract%20n%20schedule.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2016) Estimation of option-implied risk-neutral into real-world density by using calibration function. In: The 4th International Conference On Mathematical Sciences (ICMS4), 15th-17th Nov. 2016, Putrajaya. (Unpublished) http://conference.ukm.my/ICMS4/ICMS4/paper/view/3642
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English English
topic	QA Mathematics
spellingShingle	QA Mathematics Bahaludin, Hafizah Abdullah, Mimi Hafizah Estimation of option-implied risk-neutral into real-world density by using calibration function
description	Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is applied by using a fourth order polynomial interpolation to obtain the RNDs. Then, a calibration function is used to convert the RNDs into RWDs. There are two types of calibration function which are parametric and non-parametric calibrations. The density is extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity from January 2009 until December 2015. The performance of RNDs and RWDs extracted are evaluated by using a density forecasting test. This study found out that the RWDs obtain can provide an accurate information regarding the price of the underlying asset in future compared to that of the RNDs. In addition, empirical evidence suggests that RWDs from a non-parametric calibration has a better accuracy than other densities.
format	Conference or Workshop Item
author	Bahaludin, Hafizah Abdullah, Mimi Hafizah
author_facet	Bahaludin, Hafizah Abdullah, Mimi Hafizah
author_sort	Bahaludin, Hafizah
title	Estimation of option-implied risk-neutral into real-world density by using calibration function
title_short	Estimation of option-implied risk-neutral into real-world density by using calibration function
title_full	Estimation of option-implied risk-neutral into real-world density by using calibration function
title_fullStr	Estimation of option-implied risk-neutral into real-world density by using calibration function
title_full_unstemmed	Estimation of option-implied risk-neutral into real-world density by using calibration function
title_sort	estimation of option-implied risk-neutral into real-world density by using calibration function
publishDate	2016
url	http://irep.iium.edu.my/54103/ http://irep.iium.edu.my/54103/ http://irep.iium.edu.my/54103/1/icms4%20full%20paper.pdf http://irep.iium.edu.my/54103/2/icsm4%20abstract%20n%20schedule.pdf
first_indexed	2023-09-18T21:16:32Z
last_indexed	2023-09-18T21:16:32Z
_version_	1777411600113729536

Estimation of option-implied risk-neutral into real-world density by using calibration function

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