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Testing the forecasting performace of IBEX 35 option implied risk neutral densities

Author

Listed:
  • Francisco Alonso

    (Banco de España)

  • Roberto Blanco

    (Banco de España)

  • Gonzalo Rubio

    (Euskal Herriko Unibertsitatea)

Abstract

The main objective of this paper is to test whether the risk neutral densities (RNDs) implied in the prices of the future options contract on the Spanish IBEX 35 index accurately predict the distribution of future outcomes of the underlying asset. We estimate RNDs using both parametric and nonparametric procedures. We find that between 1996 and 2003 we cannot reject the hypothesis that the RNDs provide accurate predictions of the distributions of future realisations of the IBEX 35 index at four week horizon. However, this result is not robust by subperiods. In particular, from October 1996 to February 2000, we find that RNDs are not able to consistently predict the actual realisations of returns. In this period, option prices assign a low risk neutral probability to large rises compared with realisations. Tests based on the tails of the distribution show that RNDs significantly understate the right tail of the distribution for both the whole period and the first subperiod.

Suggested Citation

  • Francisco Alonso & Roberto Blanco & Gonzalo Rubio, 2005. "Testing the forecasting performace of IBEX 35 option implied risk neutral densities," Working Papers 0504, Banco de España.
    • Handle: RePEc:bde:wpaper:0504
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    References listed on IDEAS

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    Cited by:

    1. Ricardo Crisóstomo & Lorena Couso, 2018. "Financial density forecasts: A comprehensive comparison of risk‐neutral and historical schemes," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 37(5), pages 589-603, August.
    2. Maria Grith & Wolfgang K. Härdle & Volker Krätschmer, 2017. "Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle," Review of Finance, European Finance Association, vol. 21(1), pages 269-298.
    3. Alonso, Francisco & Blanco, Roberto & Rubio Irigoyen, Gonzalo, 2005. "Option-Implied Preferences Adjustments and Risk-Neutral Density Forecasts," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Francisco Alonso & Roberto Blanco & Gonzalo Rubio, 2009. "Option-implied preferences adjustments, density forecasts, and the equity risk premium," Spanish Economic Review, Springer;Spanish Economic Association, vol. 11(2), pages 141-164, June.
    5. 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.
    6. Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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