Comparison of volatility function technique for risk-neutral densities estimation

Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RN...

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Main Authors:	Bahaludin, Hafizah, Abdullah, Mimi Hafizah
Format:	Conference or Workshop Item
Language:	English English
Published:	American Institute of Physics 2017
Subjects:	QA Mathematics
Online Access:	http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/8/57987-Comparison%20of%20Volatility.pdf http://irep.iium.edu.my/57987/14/Comparison%20of%20volatility%20function%20technique%20for%20risk-neutral%20densities%20estimation.pdf

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recordtype	eprints
spelling	iium-579872019-10-09T00:45:22Z http://irep.iium.edu.my/57987/ Comparison of volatility function technique for risk-neutral densities estimation Bahaludin, Hafizah Abdullah, Mimi Hafizah QA Mathematics Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RND. The implied volatility of options with respect to strike prices/delta are interpolated to obtain a well behaved density. The statistical analysis and forecast accuracy are tested using moments of distribution. The difference between the first moment of distribution and the price of underlying asset at maturity is used as an input to analyze forecast accuracy. RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity for the period from January 2011 until December 2015. The empirical results suggest that the estimation of RND using a fourth order polynomial is more appropriate to be used compared to a smoothing spline in which the fourth order polynomial gives the lowest mean square error (MSE). The results can be used to help market participants capture market expectations of the future developments of the underlying asset. American Institute of Physics 2017 Conference or Workshop Item PeerReviewed application/pdf en http://irep.iium.edu.my/57987/8/57987-Comparison%20of%20Volatility.pdf application/pdf en http://irep.iium.edu.my/57987/14/Comparison%20of%20volatility%20function%20technique%20for%20risk-neutral%20densities%20estimation.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2017) Comparison of volatility function technique for risk-neutral densities estimation. In: The 24th National Symposium On Mathematical Sciences: Mathematical Sciences Exploration For The Universal Preservation, 27-29 Sept 2016, Kuala Terengganu, Terengganu, Malaysia.. http://aip.scitation.org/doi/10.1063/1.4995905 10.1063/1.4995905
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 Comparison of volatility function technique for risk-neutral densities estimation
description	Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RND. The implied volatility of options with respect to strike prices/delta are interpolated to obtain a well behaved density. The statistical analysis and forecast accuracy are tested using moments of distribution. The difference between the first moment of distribution and the price of underlying asset at maturity is used as an input to analyze forecast accuracy. RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity for the period from January 2011 until December 2015. The empirical results suggest that the estimation of RND using a fourth order polynomial is more appropriate to be used compared to a smoothing spline in which the fourth order polynomial gives the lowest mean square error (MSE). The results can be used to help market participants capture market expectations of the future developments of the underlying asset.
format	Conference or Workshop Item
author	Bahaludin, Hafizah Abdullah, Mimi Hafizah
author_facet	Bahaludin, Hafizah Abdullah, Mimi Hafizah
author_sort	Bahaludin, Hafizah
title	Comparison of volatility function technique for risk-neutral densities estimation
title_short	Comparison of volatility function technique for risk-neutral densities estimation
title_full	Comparison of volatility function technique for risk-neutral densities estimation
title_fullStr	Comparison of volatility function technique for risk-neutral densities estimation
title_full_unstemmed	Comparison of volatility function technique for risk-neutral densities estimation
title_sort	comparison of volatility function technique for risk-neutral densities estimation
publisher	American Institute of Physics
publishDate	2017
url	http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/ http://irep.iium.edu.my/57987/8/57987-Comparison%20of%20Volatility.pdf http://irep.iium.edu.my/57987/14/Comparison%20of%20volatility%20function%20technique%20for%20risk-neutral%20densities%20estimation.pdf
first_indexed	2023-09-18T21:21:58Z
last_indexed	2023-09-18T21:21:58Z
_version_	1777411942074286080

Comparison of volatility function technique for risk-neutral densities estimation

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