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Analyzing the Risks Embedded in Option Prices with rndfittool

Author

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  • Andrea Barletta

    (Department of Economics and Business Economics, Aarhus University, 8210 Aarhus V, Denmark)

  • Paolo Santucci de Magistris

    (Department of Economics and Finance, LUISS University, 00197 Rome, Italy
    Center for Research in Econometric Analysis of Time Series (CREATES), Aarhus University, Fuglesangs Alle 4, 8210 Aarhus, Denmark)

Abstract

This paper introduces a new computational tool for the analysis of the risks embedded in a set of prices of European-style options. The software enables the estimation of the risk-neutral density (RND) from the observed option prices by means of orthogonal polynomial expansions. Orthogonal polynomials offer a viable alternative to more standard techniques based on interpolation and estimation of the second-order derivatives of option prices. The app rndfittool is available on GitHub and its usage is illustrated with examples based on real data.

Suggested Citation

  • Andrea Barletta & Paolo Santucci de Magistris, 2018. "Analyzing the Risks Embedded in Option Prices with rndfittool," Risks, MDPI, vol. 6(2), pages 1-15, March.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:2:p:28-:d:138299
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    References listed on IDEAS

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    1. Barletta, Andrea & Santucci de Magistris, Paolo & Violante, Francesco, 2019. "A non-structural investigation of VIX risk neutral density," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 1-20.
    2. Barletta, Andrea & Santucci de Magistris, Paolo & Sloth, David, 2019. "It only takes a few moments to hedge options," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 251-269.

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