Andersson, Magnus () (European Central Bank) Lomakka, Magnus () (AP-fund 1)
Abstract
This paper evaluates the precision of the parametric double lognormal (DLN) and the nonparametric smoothing spline method (SPLINE) for estimating risk-neutral distributions (RNDs) from observed option prices. By using a bootstrap technique confidence bands are estimated for the riskneutral distributions (RNDs) and the width is used as the criterion when evaluating the precision of the two. Previous literature on estimating confidence bands has to a large extent been estimated by Monte Carlo methods. We argue that the bootstrap technique is to be preferred due to the non-normality of the error structure. Our findings favour the SPLINE method, yielding tighter confidence bands. An example showing how the confidence intervals could be used for practical purposes is also provided.
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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number
146.
Length: 24 pages Date of creation: 01 Jan 2003 Date of revision: Publication status: Published in Journal of Banking & Finance, 2005, pages 1535-1557. Handle: RePEc:hhs:rbnkwp:0146
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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