Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar
AbstractThis research paper presents statistical comparisons between two methods that are commonly used to estimate option implied Risk-Neutral Densities (RND). These are: 1) mixture of lognormals (MXL); and, 2) volatility function technique (VFT). The former is a parametric method whilst the latter is a non-parametric approach. The RNDs are extracted from over-thecounter European-style options on the Mexican Peso–US Dollar exchange rate. The non-parametric method was the superior one for out-of-sample evaluations. The implied mean, median and mode were, in general, statistically different between the competing approaches. It is recommended to apply the VFT instead of the MXL given that the former has superior accuracy and it can be estimated when there is a relatively short crosssection of option exercise price range. The results have implications for financial investors and policy makers given that they could use the information content in options to analyze market’s perceptions about the future expected variability of the financial asset under study.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Universidad Autonoma de Nuevo Leon, Facultad de Economia in its journal Ensayos Revista de Economia.
Volume (Year): XXVII (2008)
Issue (Month): 1 (May)
Contact details of provider:
Postal: Avenida Lazaro Cardenas 4600 Ote., Fraccionamiento Residencial Las Torres, C.P. 64930. Monterrey, Nuevo Leon. México.
Phone: +52 (81) 8329 4150
Fax: +52 (81) 8342 2897
Web page: http://www.economia.uanl.mx
More information through EDIRC
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diebold, Francis X & Mariano, Roberto S, 1995.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 13(3), pages 253-63, July.
- Tom Doan, . "DMARIANO: RATS procedure to compute Diebold-Mariano Forecast Comparison Test," Statistical Software Components RTS00055, Boston College Department of Economics.
- Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
- Ritchey, Robert J, 1990. "Call Option Valuation for Discrete Normal Mixtures," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 13(4), pages 285-96, Winter.
- Hördahl, Peter & Vestin, David, 2003.
"Interpreting implied risk-neutral densities: the role of risk premia,"
Working Paper Series
0274, European Central Bank.
- Peter Hördahl & David Vestin, 2005. "Interpreting Implied Risk-Neutral Densities: The Role of Risk Premia," Review of Finance, Springer, vol. 9(1), pages 97-137, 03.
- Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
- Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
- Abadir, Karim M. & Rockinger, Michael, 2003. "Density Functionals, With An Option-Pricing Application," Econometric Theory, Cambridge University Press, vol. 19(05), pages 778-811, October.
- Peter Christoffersen & Stefano Mazzotta, 2004.
"The Informational Content of Over-the-Counter Currency Options,"
CIRANO Working Papers
- Christoffersen, Peter & Mazzotta, Stefano, 2004. "The informational content of over-the-counter currency options," Working Paper Series 0366, European Central Bank.
- Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
- Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
- Ruijun Bu & Kaddour Hadri, 2007. "Estimating option implied risk-neutral densities using spline and hypergeometric functions," Econometrics Journal, Royal Economic Society, vol. 10(2), pages 216-244, 07.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dora María Vega Facio).
If references are entirely missing, you can add them using this form.