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A View on the Risk-Neutral Density Forecasting of the Dax30 Returns

Author

Listed:
  • Duca, Ioana Andreea

    (The Academy of Economic Studies, Bucharest)

  • Ruxanda, Gheorghe

    (The Academy of Economic Studies, Bucharest)

Abstract

Option-implied risk-neutral densities incorporate market expectations with respect to the future course of option underlyings. Under the risk neutrality assumption various methods have been developed. In this paper, we look into two of them: parametric mixture of lognormals method and non-parametric Rookley method. We use option data on the DAX30 index. The Berkowitz test is employed to check the goodness of fit of the estimated densities, while we use the llikelihood criterion to compare their performance. Our results show that risk-neutral densities can be good predictors for horizons of 4, 5 and 6 weeks, while for horizons of 2 and 3 weeks the null hypothesis that risk neutral densities are accurate predictors of the distribution of the DAX30 returns is rejected.

Suggested Citation

  • Duca, Ioana Andreea & Ruxanda, Gheorghe, 2013. "A View on the Risk-Neutral Density Forecasting of the Dax30 Returns," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 101-114, June.
    • Handle: RePEc:rjr:romjef:v::y:2013:i:2:p:101-114
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    risk neutral density; mixture of lognormals; kernel smoothing in implied volatility space; option prices;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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