Comparison of volatility function technique for risk-neutral densities estimation.

Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RN...

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Main Authors:	Abdullah, Mimi Hafizah, Bahaludin, Hafizah
Format:	Conference or Workshop Item
Language:	English English
Published:	2016
Subjects:	QA Mathematics
Online Access:	http://irep.iium.edu.my/52365/ http://irep.iium.edu.my/52365/ http://irep.iium.edu.my/52365/3/sksm%2024%20full%20paper.pdf http://irep.iium.edu.my/52365/13/52365_cover%20page%20syposium%20mathematic%20backup%20backup.pdf

id	iium-52365
recordtype	eprints
spelling	iium-523652016-10-19T05:07:28Z http://irep.iium.edu.my/52365/ Comparison of volatility function technique for risk-neutral densities estimation. Abdullah, Mimi Hafizah Bahaludin, Hafizah QA Mathematics Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RND. The implied volatility of options with respect to strike prices/delta are interpolated to obtain a well behaved density. The statistical analysis and forecast accuracy are tested using moments of distribution. The difference between the first moment of distribution and the price of underlying asset at maturity is used as an input to analyze forecast accuracy. RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity for the period from January 2011 until December 2015. The empirical results suggest that the estimation of RND using a fourth order polynomial is more appropriate to be used compared to a smoothing spline in which the fourth order polynomial gives the lowest mean square error (MSE). The results can be used to help market participants capture market expectations of the future developments of the underlying asset. 2016-09 Conference or Workshop Item PeerReviewed application/pdf en http://irep.iium.edu.my/52365/3/sksm%2024%20full%20paper.pdf application/pdf en http://irep.iium.edu.my/52365/13/52365_cover%20page%20syposium%20mathematic%20backup%20backup.pdf Abdullah, Mimi Hafizah and Bahaludin, Hafizah (2016) Comparison of volatility function technique for risk-neutral densities estimation. In: Simposium Kebangsaan Sains Matematik Ke 24, 27-29 september 2016, Primula Beach Hotel, Kuala Terrengganu. (Unpublished) http://sksm24.umt.edu.my/wp-content/uploads/sites/82/2016/05/1flyers_english-1.pdf
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English English
topic	QA Mathematics
spellingShingle	QA Mathematics Abdullah, Mimi Hafizah Bahaludin, Hafizah Comparison of volatility function technique for risk-neutral densities estimation.
description	Volatility function technique by using interpolation approach plays an important role in extracting the risk-neutral density (RND) of options. The aim of this study is to compare the performances of two interpolation approaches namely smoothing spline and fourth order polynomial in extracting the RND. The implied volatility of options with respect to strike prices/delta are interpolated to obtain a well behaved density. The statistical analysis and forecast accuracy are tested using moments of distribution. The difference between the first moment of distribution and the price of underlying asset at maturity is used as an input to analyze forecast accuracy. RNDs are extracted from the Dow Jones Industrial Average (DJIA) index options with a one month constant maturity for the period from January 2011 until December 2015. The empirical results suggest that the estimation of RND using a fourth order polynomial is more appropriate to be used compared to a smoothing spline in which the fourth order polynomial gives the lowest mean square error (MSE). The results can be used to help market participants capture market expectations of the future developments of the underlying asset.
format	Conference or Workshop Item
author	Abdullah, Mimi Hafizah Bahaludin, Hafizah
author_facet	Abdullah, Mimi Hafizah Bahaludin, Hafizah
author_sort	Abdullah, Mimi Hafizah
title	Comparison of volatility function technique for risk-neutral densities estimation.
title_short	Comparison of volatility function technique for risk-neutral densities estimation.
title_full	Comparison of volatility function technique for risk-neutral densities estimation.
title_fullStr	Comparison of volatility function technique for risk-neutral densities estimation.
title_full_unstemmed	Comparison of volatility function technique for risk-neutral densities estimation.
title_sort	comparison of volatility function technique for risk-neutral densities estimation.
publishDate	2016
url	http://irep.iium.edu.my/52365/ http://irep.iium.edu.my/52365/ http://irep.iium.edu.my/52365/3/sksm%2024%20full%20paper.pdf http://irep.iium.edu.my/52365/13/52365_cover%20page%20syposium%20mathematic%20backup%20backup.pdf
first_indexed	2023-09-18T21:14:12Z
last_indexed	2023-09-18T21:14:12Z
_version_	1777411452761538560

Comparison of volatility function technique for risk-neutral densities estimation.

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