IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Testing the stability of implied probability density functions

  • Robert R. Bliss
  • Nikolaos Panigirtzoglou
Registered author(s):

    Implied probability density functions (PDFs) estimated from cross-sections of observed options prices are gaining increasing attention amongst academics and practitioners. However, to date little attention has been paid to the robustness of these estimates or to the confidence users can place in the summary statistics, for example skewness or the 99th percentile, derived from fitted PDFs. This paper begins to address these questions by examining the absolute and relative robustness of two of the most common methods for estimating implied smile methods. The changes resulting from randomly perturbing quoted prices by no more than a half tick provide a lower bound on the confidence intervals of the summary statistics derived from the estimated PDFs. Test are conducted using options contracts tied to Short Sterling futures and the FTSE 100 index--both trading on the London International Financial Futures Exchange. Our test show that the smoothed implied volatility smile method dominates the double-lognormal as a technique for estimating implied PDFs when average goodness-of-fits are comparable for both methods.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/1999/wp99_21.pdf
    Download Restriction: no

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-99-21.

    as
    in new window

    Length:
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:fip:fedhwp:wp-99-21
    Contact details of provider: Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834
    Phone: 312/322-5111
    Fax: 312/322-5515
    Web page: http://www.chicagofed.org/Email:


    More information through EDIRC

    Order Information: Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email:


    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-99-21. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.