Non-parametric extraction of implied asset price distributions

Jerome V. Healy, Maurice Dixon, Brian J. Read and Fang Fang Cai

Physica A: Statistical Mechanics and its Applications, 2007, vol. 382, issue 1, 121-128

Abstract: We present a fully non-parametric method for extracting risk neutral densities (RNDs) from observed option prices. The aim is to obtain a continuous, smooth, monotonic, and convex pricing function that is twice differentiable. Thus, irregularities such as negative probabilities that afflict many existing RND estimation techniques are reduced. Our method employs neural networks to obtain a smoothed pricing function, and a central finite difference approximation to the second derivative to extract the required gradients.

Keywords: Option pricing; Risk neutral density; Risk management; Neural nets; Econophysics (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:382:y:2007:i:1:p:121-128

DOI: 10.1016/j.physa.2007.02.013

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