Empirical performance of interpolation techniques in risk-neutral density (RND) estimation
The objective of this study is to evaluate the empirical performance of interpolation techniques in risk-neutral density (RND) estimation. Firstly, the empirical performance is evaluated by using statistical analysis based on the implied mean and the implied variance of RND. Secondly, the interpolat...
| Main Authors: | , |
|---|---|
| Format: | Proceeding Paper |
| Language: | English English English |
| Published: |
Institute of Physics Publishing
2017
|
| Subjects: | |
| Online Access: | http://irep.iium.edu.my/57287/ http://irep.iium.edu.my/57287/1/57287_Empirical%20performance%20_complete.pdf http://irep.iium.edu.my/57287/2/57287_Empirical%20performance%20_SCOPUS.pdf http://irep.iium.edu.my/57287/13/57287%20Empirical%20performance%20of%20interpolation%20techniques%20WOS.pdf |
| _version_ | 1848784903230980096 |
|---|---|
| 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 evaluate the empirical performance of interpolation techniques in risk-neutral density (RND) estimation. Firstly, the empirical performance is evaluated by using statistical analysis based on the implied mean and the implied variance of RND. Secondly, the interpolation performance is measured based on pricing error. We propose using the leave-one-out cross-validation (LOOCV) pricing error for interpolation selection purposes. The statistical analyses indicate that there are statistical differences between the interpolation techniques:second-order polynomial, fourth-order polynomial and smoothing spline. The results of LOOCV pricing error shows that interpolation by using fourth-order polynomial provides the best fitting to option prices in which it has the lowest value error. |
| first_indexed | 2025-11-14T16:44:38Z |
| format | Proceeding Paper |
| id | iium-57287 |
| institution | International Islamic University Malaysia |
| institution_category | Local University |
| language | English English English |
| last_indexed | 2025-11-14T16:44:38Z |
| publishDate | 2017 |
| publisher | Institute of Physics Publishing |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | iium-572872019-09-30T04:25:01Z http://irep.iium.edu.my/57287/ Empirical performance of interpolation techniques in risk-neutral density (RND) estimation Bahaludin, Hafizah Abdullah, Mimi Hafizah Q Science (General) QA Mathematics QC Physics The objective of this study is to evaluate the empirical performance of interpolation techniques in risk-neutral density (RND) estimation. Firstly, the empirical performance is evaluated by using statistical analysis based on the implied mean and the implied variance of RND. Secondly, the interpolation performance is measured based on pricing error. We propose using the leave-one-out cross-validation (LOOCV) pricing error for interpolation selection purposes. The statistical analyses indicate that there are statistical differences between the interpolation techniques:second-order polynomial, fourth-order polynomial and smoothing spline. The results of LOOCV pricing error shows that interpolation by using fourth-order polynomial provides the best fitting to option prices in which it has the lowest value error. Institute of Physics Publishing 2017-04-03 Proceeding Paper NonPeerReviewed application/pdf en http://irep.iium.edu.my/57287/1/57287_Empirical%20performance%20_complete.pdf application/pdf en http://irep.iium.edu.my/57287/2/57287_Empirical%20performance%20_SCOPUS.pdf application/pdf en http://irep.iium.edu.my/57287/13/57287%20Empirical%20performance%20of%20interpolation%20techniques%20WOS.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2017) Empirical performance of interpolation techniques in risk-neutral density (RND) estimation. In: 37th International Conference on Quantum Probability and Related Topics, QP 2016; Faculty of Science of the International Islamic University MalaysiaKuantan; Malaysia, 22-26 August 2016, International Islamic University Malaysia, Kuantan Pahang. http://iopscience.iop.org/article/10.1088/1742-6596/819/1/012026/pdf 10.1088/1742-6596/819/1/012026 |
| spellingShingle | Q Science (General) QA Mathematics QC Physics Bahaludin, Hafizah Abdullah, Mimi Hafizah Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title | Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title_full | Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title_fullStr | Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title_full_unstemmed | Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title_short | Empirical performance of interpolation techniques in risk-neutral density (RND) estimation |
| title_sort | empirical performance of interpolation techniques in risk-neutral density (rnd) estimation |
| topic | Q Science (General) QA Mathematics QC Physics |
| url | http://irep.iium.edu.my/57287/ http://irep.iium.edu.my/57287/ http://irep.iium.edu.my/57287/ http://irep.iium.edu.my/57287/1/57287_Empirical%20performance%20_complete.pdf http://irep.iium.edu.my/57287/2/57287_Empirical%20performance%20_SCOPUS.pdf http://irep.iium.edu.my/57287/13/57287%20Empirical%20performance%20of%20interpolation%20techniques%20WOS.pdf |