Cover IMF Working Papers
Buy Book in Print
A New Framework to Estimate the Risk-Neutral Probability Density Functions Embedded in Options Prices
Author:
Mr. Kevin C Cheng
Search for other papers by Mr. Kevin C Cheng in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2010: Issue 181
Language:
English
Publication Date:
01 Aug 2010
DOI:
https://doi.org/10.5089/9781455202157.001
ISBN:
9781455202157
ISSN:
1018-5941
Pages:
31
Keywords:
WP
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.8 MB) Download Epub
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&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.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund