Robust Estimation of Risk-Neutral Moments
Manuel Ammann () and
Alexander Feser ()
No 1902, Working Papers on Finance from University of St. Gallen, School of Finance
This study provides an in-depth analysis of how to estimate risk-neutral moments robustly. A simulation and an empirical study show that estimating risk-neutral moments presents a trade-off-between (1) the bias of estimates caused by a limited strike price domain and (2) the variance of estimates induced by mirco-structural noise. The best trade-off is offered by option-implied quantile moments estimated from a volatility surface interpolated with a local-linear kernel regression and extrapolated linearly. A similarly good trade-off is achieved by estimating regular central option-implied moments from a volatility surface interpolated with a cubic smoothing spline and flat extrapolation.
Keywords: risk-neutral moments; risk-neutral distribution (search for similar items in EconPapers)
JEL-codes: C14 G10 G13 G17 (search for similar items in EconPapers)
Pages: 54 pages
New Economics Papers: this item is included in nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2019:02
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