Risk-Neutral Densities and Their Application in the Piterbarg Framework

Alexis Levendis () and Pierre Venter
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Alexis Levendis: University of Johannesburg
Pierre Venter: University of Johannesburg

Chapter Chapter 4 in Advances in Cross-Section Data Methods in Applied Economic Research, 2020, pp 59-74 from Springer

Abstract: Abstract In this paper, weLevendis, Alexis consider two well-known interpolation schemes for the construction of the JSE Shareholder Weighted Top 40 implied volatility surface. We extend the Breeden and Litzenberger formula to the derivative pricing frameworkVenter, Pierre developed by Piterbarg post the 2007 financial crisis. Our results show that the statistical moments of the constructed risk-neutral densities are highly dependent on the choice of interpolation scheme. We show how the risk-neutral density surface can be used to price options and briefly describe how the statistical moments can be used to inform trading strategies.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-38253-7_4

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DOI: 10.1007/978-3-030-38253-7_4

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