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Robust recovery of the risk neutral probability density from option prices

Author

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  • Gabriel Turinici

    (Université Paris Dauphine, Paris, France)

Abstract

We present in this paper a robust numerical procedure that allows extracting the risk neutral probability density data from a set of quoted European option prices. The procedure does not use any specific evolution model for the underlying; the probability density is the solution of a fitting problem to which we add a penalty term to ensure smoothness of the result. We give some examples from FOREX markets.

Suggested Citation

  • Gabriel Turinici, 2009. "Robust recovery of the risk neutral probability density from option prices," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 56, pages 197-201, November.
    • Handle: RePEc:aic:journl:y:2009:v:56:p:197-201
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    References listed on IDEAS

    as
    1. Gabriel Turinici, 2009. "Calibration of local volatility using the local and implied instantaneous variance," Post-Print hal-00338114, HAL.
    2. Gabriel Turinici, 2008. "Local volatility calibration using an adjoint proxy," Post-Print hal-00306187, HAL.
    3. Gabriel TURINICI, 2008. "Local Volatility Calibration Using An Adjoint Proxy," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 2, pages 93-105, November.
    Full references (including those not matched with items on IDEAS)

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