Robust recovery of the risk neutral probability density from option prices

Gabriel Turinici ()
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Gabriel Turinici: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We present in this paper a robust numerical procedure that allows extracting the risk neutral probability density data from a set of quoted European option prices. The procedure does not use any specific evolution model for the underlying; the probability density is the solution of a fitting problem to which we add a penalty term to ensure smoothness of the result. We give some examples from FOREX markets.

Keywords: mathematical finance; risk neutral probability density; calibration (search for similar items in EconPapers)
Date: 2009-12-01
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Published in Sci. Ann. “Al I Cuza” Univ. Iasi – Eco, 2009, LVI (1), pp.197-201

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00467555

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