A New Framework to Estimate the Risk-Neutral Probability Density Functions Embedded in Options Prices /

Building on the widely-used double-lognormal approach by Bahra (1997), this paper presents a multi-lognormal approach with restrictions to extract risk-neutral probability density functions (RNPs) for various asset classes. The contributions are twofold: first, on the technical side, the paper propo...

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Autor principal: Cheng, Kevin
Format: Revista
Idioma:English
Publicat: Washington, D.C. : International Monetary Fund, 2010.
Col·lecció:IMF Working Papers; Working Paper ; No. 2010/181
Accés en línia:Full text available on IMF
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520 3 |a Building on the widely-used double-lognormal approach by Bahra (1997), this paper presents a multi-lognormal approach with restrictions to extract risk-neutral probability density functions (RNPs) for various asset classes. The contributions are twofold: first, on the technical side, the paper proposes useful transformation/restrictions to Bahra's original formulation for achieving economically sensible outcomes. In addition, the paper compares the statistical properties of the estimated RNPs among major asset classes, including commodities, the S and P 500, the dollar/euro exchange rate, and the US 10-year Treasury Note. Finally, a Monte Carlo study suggests that the multi-lognormal approach outperforms the double-lognormal approach. 
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