Implied Risk-Neutral probability Density functions from options prices: A comparison of estimation methods

Rihab Bedoui () and Haykel Hamdi
Additional contact information
Rihab Bedoui: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

Working Papers from HAL

Abstract: This paper compares the goodness-of-fit of eight option-based approaches used to extract risk-neutral probability density functions from a high-frequency CAC 40 index options during a normal and troubled period. Our findings show that the kernel estimator generates a strong volatility smile with respect to the moneyness, and the kernel smiles shape varies with the chosen time to maturity. The mixture of log-normals, Edgeworth expansion, hermite polynomials, jump diffusion and Heston models are more in line and have heavier tails than the log-normal distribution. Moreover, according to the goodness of fit criteria we compute, the jump diffusion model provides a much better fit than the other models on the period just-before the crisis for relatively short maturities. However, during this same period, the mixture of log-normal models performs better for more than three month maturity. Furthermore, in the troubled period and the period just-after the crisis, we find that semi-parametric models are the methods with the best accuracy in fitting observed option prices for all maturities with a minimal difference towards the mixture of log-normals model.

Keywords: Risk-neutral density; mixture of log-normal distributions; Edgeworth expansions; Hermite polynomials; tree-based methods; kernel regression; Heston’s stochastic volatility model; jump diffusion model (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://hal.science/hal-04140913
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-04140913/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04140913

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().