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The forecasting performance of German stock option densities

Author

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  • Ben R. Craig
  • Ernst Glatzer
  • Joachim G. Keller
  • Martin Scheicher

Abstract

In this paper the authors estimate risk-neutral densities (RND) for the largest euro-area stock market (the index of which is the German DAX), reporting their statistical properties, and evaluating their forecasting performance. The authors have applied an innovative test procedure to a new, rich, and accurate data set. They have two main results. First, They have recorded strong negative skewness in the densities. Second, they find evidence for a significant difference between the actual density and the risk-neutral density, leading to the conclusion that market participants were surprised by the extent of both the rise and the fall of the DAX.

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  • Ben R. Craig & Ernst Glatzer & Joachim G. Keller & Martin Scheicher, 2003. "The forecasting performance of German stock option densities," Working Papers (Old Series) 0312, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0312
    DOI: 10.26509/frbc-wp-200312
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    4. Constantinides, George M. & Jackwerth, Jens Carsten & Perrakis, Stylianos, 2005. "Option pricing: Real and risk-neutral distributions," CoFE Discussion Papers 05/06, University of Konstanz, Center of Finance and Econometrics (CoFE).
    5. Jondeau, Eric & Rockinger, Michael, 2000. "Reading the smile: the message conveyed by methods which infer risk neutral densities," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 885-915, December.
    6. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-883, November.
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    10. Keller, Joachim G. & Craig, Ben R., 2002. "The Empirical Performance of Option Based Densities of Foreign Exchange," Discussion Paper Series 1: Economic Studies 2002,07, Deutsche Bundesbank.
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    Cited by:

    1. 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.
    2. Didier Sornette & Peter Cauwels & Georgi Smilyanov, 2017. "Can We Use Volatility to Diagnose Financial Bubbles? Lessons from 40 Historical Bubbles," Swiss Finance Institute Research Paper Series 17-27, Swiss Finance Institute.
    3. Scharnagl, Michael & Stapf, Jelena, 2015. "Inflation, deflation, and uncertainty: What drives euro-area option-implied inflation expectations, and are they still anchored in the sovereign debt crisis?," Economic Modelling, Elsevier, vol. 48(C), pages 248-269.
    4. Wolfgang Härdle & Zdenek Hlavka, 2005. "Dynamics of State Price Densities," SFB 649 Discussion Papers SFB649DP2005-021, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. Belén Nieto & Gonzalo Rubio, 2007. "Measuring time-varying economic fears with consumption-based stochastic discount factors," Economics Working Papers 1029, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2007.
    6. Kaufmann Sylvia & Scheicher Martin, 2006. "A Switching ARCH Model for the German DAX Index," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-37, December.
    7. Scharnagl, Michael & Stapf, Jelena, 2014. "Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis?," Discussion Papers 24/2014, Deutsche Bundesbank.
    8. 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.

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    More about this item

    Keywords

    Stock market - Germany; Stock options;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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