Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5091020 | Journal of Banking & Finance | 2007 | 20 Pages |
Abstract
Risk-neutral and real-world densities are derived from option prices and risk assumptions, and are compared with historical densities obtained from time series. Two parametric risk-transformations are used to convert risk-neutral densities into real-world densities. Both transformations are estimated by maximizing the likelihood of observed index levels, for two parametric density families. Results for the FTSE-100 index show that parametric densities derived from option prices have more explanatory power than historical densities and higher likelihoods than densities estimated by spline methods. A combination of parametric real-world and historical densities provides the preferred predictive densities.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Xiaoquan Liu, Mark B. Shackleton, Stephen J. Taylor, Xinzhong Xu,