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 appli...
| Main Authors: | , |
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| Format: | Proceeding Paper |
| Language: | English English |
| Published: |
American Institute of Physics
2017
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/57989/ http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf |
| _version_ | 1848785031186612224 |
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| author | Bahaludin, Hafizah Abdullah, Mimi Hafizah |
| author_facet | Bahaludin, Hafizah Abdullah, Mimi Hafizah |
| author_sort | Bahaludin, Hafizah |
| building | IIUM Repository |
| collection | Online Access |
| 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. |
| first_indexed | 2025-11-14T16:46:40Z |
| format | Proceeding Paper |
| id | iium-57989 |
| institution | International Islamic University Malaysia |
| institution_category | Local University |
| language | English English |
| last_indexed | 2025-11-14T16:46:40Z |
| publishDate | 2017 |
| publisher | American Institute of Physics |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | iium-579892018-03-22T07:29:22Z http://irep.iium.edu.my/57989/ 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. American Institute of Physics 2017-04-27 Proceeding Paper PeerReviewed application/pdf en http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf application/pdf en http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2017) Estimation of option-implied risk-neutral into real-world density by using calibration function. In: 4th International Conference on Mathematical Sciences - Mathematical Sciences: Championing the Way in a Problem Based and Data Driven Society, ICMS 2016;, 15-17 November 2016, Putrajaya, Malaysia. https://aip.scitation.org/doi/abs/10.1063/1.4980937?journalCode=apc https://doi.org/10.1063/1.4980937 |
| spellingShingle | QA Mathematics Bahaludin, Hafizah Abdullah, Mimi Hafizah Estimation of option-implied risk-neutral into real-world density by using calibration function |
| title | 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_short | 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 |
| topic | QA Mathematics |
| url | http://irep.iium.edu.my/57989/ http://irep.iium.edu.my/57989/ http://irep.iium.edu.my/57989/ http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf |