Reading the Smile: The Message Conveyed by Methods which Infer Risk Neutral Densities

Michael Rockinger () and Eric Jondeau

Working Papers from HAL

Abstract: In this study, we compare the quality and information content of risk neutral densities obtained by various methods. We consider a non-parametric method based on a mixture of log-normal densities, the semi-parametric ones based on an Hermite approximation or based on an Edgeworth expansion, the parametric approach of Malz which assumes a jump-diffusion for the underlying process, and Heston's approach assuming a stochastic volatility model. We apply those models on FF/DM exchange rate options for two dates. Models differ when important news hits the market (here anticipated elections). The non-parametric model provides a good fit to options prices but is unable to provide as much information about market participants expectations than the jump-diffusion model.

Keywords: Exchange rate option; Risk neutral density; Option pricing (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (3)

Published in 1997

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Related works:
Journal Article: Reading the smile: the message conveyed by methods which infer risk neutral densities (2000)
Working Paper: Reading the Smile: The Message Conveyed by Methods which Infer Risk Neutral Densities (1998)
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