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Estimation of option-implied risk-neutral into real-world density by using calibration function

Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is appli...

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Main Authors: Bahaludin, Hafizah, Abdullah, Mimi Hafizah
Format: Conference or Workshop Item
Language:English
English
Published: American Institute of Physics 2017
Subjects:
QA Mathematics
Online Access:http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf
http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf
http://irep.iium.edu.my/57989/
https://aip.scitation.org/doi/abs/10.1063/1.4980937?journalCode=apc
https://doi.org/10.1063/1.4980937
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spelling my.iium.irep.579892018-03-22T07:29:22Z http://irep.iium.edu.my/57989/ Estimation of option-implied risk-neutral into real-world density by using calibration function Bahaludin, Hafizah Abdullah, Mimi Hafizah QA Mathematics Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is applied by using a fourth order polynomial interpolation to obtain the RNDs. Then, a calibration function is used to convert the RNDs into RWDs. There are two types of calibration function which are parametric and non-parametric calibrations. The density is extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity from January 2009 until December 2015. The performance of RNDs and RWDs extracted are evaluated by using a density forecasting test. This study found out that the RWDs obtain can provide an accurate information regarding the price of the underlying asset in future compared to that of the RNDs. In addition, empirical evidence suggests that RWDs from a non-parametric calibration has a better accuracy than other densities. American Institute of Physics 2017-04-27 Conference or Workshop Item REM application/pdf en http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf application/pdf en http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2017) Estimation of option-implied risk-neutral into real-world density by using calibration function. In: 4th International Conference on Mathematical Sciences - Mathematical Sciences: Championing the Way in a Problem Based and Data Driven Society, ICMS 2016;, 15-17 November 2016, Putrajaya, Malaysia. https://aip.scitation.org/doi/abs/10.1063/1.4980937?journalCode=apc https://doi.org/10.1063/1.4980937
institution Universiti Islam Antarabangsa Malaysia
building IIUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider International Islamic University Malaysia
content_source IIUM Repository (IREP)
url_provider http://irep.iium.edu.my/
language English
English
topic QA Mathematics
spellingShingle QA Mathematics
Bahaludin, Hafizah
Abdullah, Mimi Hafizah
Estimation of option-implied risk-neutral into real-world density by using calibration function
description Option prices contain crucial information that can be used as a reflection of future development of an underlying assets’ price. The main objective of this study is to extract the risk-neutral density (RND) and the risk- world density (RWD) of option prices. A volatility function technique is applied by using a fourth order polynomial interpolation to obtain the RNDs. Then, a calibration function is used to convert the RNDs into RWDs. There are two types of calibration function which are parametric and non-parametric calibrations. The density is extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity from January 2009 until December 2015. The performance of RNDs and RWDs extracted are evaluated by using a density forecasting test. This study found out that the RWDs obtain can provide an accurate information regarding the price of the underlying asset in future compared to that of the RNDs. In addition, empirical evidence suggests that RWDs from a non-parametric calibration has a better accuracy than other densities.
format Conference or Workshop Item
author Bahaludin, Hafizah
Abdullah, Mimi Hafizah
author_facet Bahaludin, Hafizah
Abdullah, Mimi Hafizah
author_sort Bahaludin, Hafizah
title Estimation of option-implied risk-neutral into real-world density by using calibration function
title_short Estimation of option-implied risk-neutral into real-world density by using calibration function
title_full Estimation of option-implied risk-neutral into real-world density by using calibration function
title_fullStr Estimation of option-implied risk-neutral into real-world density by using calibration function
title_full_unstemmed Estimation of option-implied risk-neutral into real-world density by using calibration function
title_sort estimation of option-implied risk-neutral into real-world density by using calibration function
publisher American Institute of Physics
publishDate 2017
url http://irep.iium.edu.my/57989/13/57989%20Estimation%20of%20option-implied%20risk-neutral%20into%20real-world.pdf
http://irep.iium.edu.my/57989/7/57989_Estimation%20of%20option-implied%20risk-neutral_SCOPUS.pdf
http://irep.iium.edu.my/57989/
https://aip.scitation.org/doi/abs/10.1063/1.4980937?journalCode=apc
https://doi.org/10.1063/1.4980937
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score 13.211869

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