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Risk neutral versus real-world distribution on puclicly listed bank corporations

Author

Listed:
  • Michel Dacorogna

    (SCOR SE - SCOR SE [Paris])

  • Juan-José Francisco Miguelez

    (ESSEC Business School)

  • Marie Kratz

    (ESSEC Business School, MAP5 - UMR 8145 - Mathématiques Appliquées Paris 5 - UPD5 - Université Paris Descartes - Paris 5 - INSMI-CNRS - Institut National des Sciences Mathématiques et de leurs Interactions - CNRS Mathématiques - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this study, we examine different quantitative methods to recover the risk neutral distribution function associated to the prices of option on bank shares. This is useful for a wide range of applications, such as determining the implicit State guarantee that systemic financial institutions benefit from the State, or looking if the market prices correctly the fat tails of financial returns. We assess the performance of these techniques in various ways, including comparing market option prices and historical Values-at-Risk to option prices and Value-at-Risk implied by the estimated risk neutral distribution. We find that, contrary to what is expected for a market composed of risk averse investors, the latter is much smaller than the one obtained from real data. We discuss our results with respect to the theory of risk neutral valuation and investor risk preference.

Suggested Citation

  • Michel Dacorogna & Juan-José Francisco Miguelez & Marie Kratz, 2016. "Risk neutral versus real-world distribution on puclicly listed bank corporations," Working Papers hal-01373071, HAL.
    • Handle: RePEc:hal:wpaper:hal-01373071
    Note: View the original document on HAL open archive server: https://essec.hal.science/hal-01373071
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    References listed on IDEAS

    as
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    4. Michel Dacorogna & Marc Busse, 2017. "The Price of Being a Systemically Important Financial Institution (SIFI)," International Review of Finance, International Review of Finance Ltd., vol. 17(4), pages 611-616, December.
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    More about this item

    Keywords

    extremes; fat tail; option pricing; real world probability; risk neutral probability; SIFI; value-­at-­risk;
    All these keywords.

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