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...
| Main Authors: | , |
|---|---|
| Format: | Proceeding Paper |
| Language: | English |
| Published: |
2016
|
| Subjects: | |
| Online Access: | http://irep.iium.edu.my/52364/ http://irep.iium.edu.my/52364/3/52364.pdf |
| _version_ | 1848784042913169408 |
|---|---|
| author | Bahaludin, Hafizah Abdullah, Mimi Hafizah |
| author_facet | Bahaludin, Hafizah Abdullah, Mimi Hafizah |
| author_sort | Bahaludin, Hafizah |
| building | IIUM Repository |
| collection | Online Access |
| 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. |
| first_indexed | 2025-11-14T16:30:58Z |
| format | Proceeding Paper |
| id | iium-52364 |
| institution | International Islamic University Malaysia |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-14T16:30:58Z |
| publishDate | 2016 |
| recordtype | eprints |
| repository_type | Digital Repository |
| 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 Proceeding Paper 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) |
| spellingShingle | QA Mathematics Bahaludin, Hafizah Abdullah, Mimi Hafizah Empirical estimation of risk-neutral density from option prices |
| title | 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_short | Empirical estimation of risk-neutral density from option prices |
| title_sort | empirical estimation of risk-neutral density from option prices |
| topic | QA Mathematics |
| url | http://irep.iium.edu.my/52364/ http://irep.iium.edu.my/52364/3/52364.pdf |