Modelling the implied probability of stock market movements
Ernst Glatzer and
Martin Scheicher
No 212, Working Paper Series from European Central Bank
Abstract:
In this paper we study risk-neutral densities (RNDs) for the German stock market. The use of option prices allows us to quantify the risk-neutral probabilities of various levels of the DAX index. For the period from December 1995 to November 2001, we implement the mixture of log-normals model and a volatility-smoothing method. We discuss the time series behaviour of the implied PDFs and we examine the relations between the moments and observable factors such as macroeconomic variables, the US stock markets and credit risk. We find that the risk-neutral densities exhibit pronounced negative skewness. Our second main observation is a significant spillover of volatility, as the implied volatility and kurtosis of the DAX RND are mostly driven by the volatility of US stock prices. JEL Classification: C22, C51, G13, G15
Keywords: Option prices; risk-neutral density; spillover; volatility (search for similar items in EconPapers)
Date: 2003-01
Note: 152802
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Citations: View citations in EconPapers (3)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003212
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