IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v5y2001i1p115-128.html
   My bibliography  Save this article

A class of risk neutral densities with heavy tails

Author

Listed:
  • Niels VÖver Hartvig

    (Department of Theoretical Statistics, Department of Mathematical Sciences and MaPhySto, Ny Munkegade, DK-8000 Aarhus C, Denmark Manuscript)

  • Jens Ledet Jensen

    (Department of Theoretical Statistics, Department of Mathematical Sciences and MaPhySto, Ny Munkegade, DK-8000 Aarhus C, Denmark Manuscript)

  • Jan Pedersen

    (Department of Theoretical Statistics, Department of Mathematical Sciences and MaPhySto, Ny Munkegade, DK-8000 Aarhus C, Denmark Manuscript)

Abstract

From observed bid and ask prices of European call and put options we estimate the risk neutral density of a stock at some future time $t>0$. We restrict attention to a class of densities with heavy tails and use a Bayesian formulation in order to study the variation in the distributions fitting the data. Heavy tails are here meant in the intuitive sense of being heavier than the tails of a normal distribution. From the fitted risk neutral density we also consider the inverse problem of finding the volatility in a diffusion model for the price process. Finally, we apply our methods to data on the S&P 500 index.

Suggested Citation

  • Niels VÖver Hartvig & Jens Ledet Jensen & Jan Pedersen, 2001. "A class of risk neutral densities with heavy tails," Finance and Stochastics, Springer, vol. 5(1), pages 115-128.
    • Handle: RePEc:spr:finsto:v:5:y:2001:i:1:p:115-128
    Note: received: June 1999 / final version received: March 2000
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/1005001/10050115.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cortés, Lina M. & Mora-Valencia, Andrés & Perote, Javier, 2020. "Retrieving the implicit risk neutral density of WTI options with a semi-nonparametric approach," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. R. Fernández-Pascual & M. Ruiz-Medina & J. Angulo, 2003. "Multiscale estimation of processes related to the fractional Black-Scholes equation," Computational Statistics, Springer, vol. 18(3), pages 401-415, September.
    3. Lina M. Cortés & Javier Perote & Andrés Mora-Valencia, 2017. "Implicit probability distribution for WTI options: The Black Scholes vs. the semi-nonparametric approach," Documentos de Trabajo CIEF 15923, Universidad EAFIT.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:5:y:2001:i:1:p:115-128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.