Evaluating Implied RNDs by some New Confidence Interval Estimation Techniques

Magnus Andersson () and Magnus Lomakka ()
Additional contact information
Magnus Andersson: European Central Bank, Postal: Capital Market and Financial Structure Division, Postfach 16 03 19, D-60066 Frankfurt am Main, Germany
Magnus Lomakka: AP-fund 1, Postal: Skeppsbron 2, SE-103 25 Stockholm, Sweden

No 146, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper evaluates the precision of the parametric double lognormal (DLN) and the nonparametric smoothing spline method (SPLINE) for estimating risk-neutral distributions (RNDs) from observed option prices. By using a bootstrap technique confidence bands are estimated for the riskneutral distributions (RNDs) and the width is used as the criterion when evaluating the precision of the two. Previous literature on estimating confidence bands has to a large extent been estimated by Monte Carlo methods. We argue that the bootstrap technique is to be preferred due to the non-normality of the error structure. Our findings favour the SPLINE method, yielding tighter confidence bands. An example showing how the confidence intervals could be used for practical purposes is also provided.

Keywords: Implied risk-neutral distribution; confidence intervals; bootstrap (search for similar items in EconPapers)
JEL-codes: C14 E59 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2003-01-01
New Economics Papers: this item is included in nep-cfn, nep-ets, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Banking & Finance, 2005, pages 1535-1557.

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