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A Bayesian Beta Markov Random Field calibration of the term structure of implied risk neutral densities

Author

Listed:
  • Roberto Casarin

    () (Department of Economics, University of Venice C� Foscari)

  • Fabrizio Leisen

    (Department of Economics, University of Kent)

  • German Molina

    (Idalion Capital US LP)

  • Enrique Ter Horst

    (CESA & IESA)

Abstract

We build on Fackler and King (1990) and propose a general calibration model for implied risk neutral densities. Our model allows for the joint calibration of a set of densities at different maturities and dates. The model is a Bayesian dynamic beta Markov random field which allows for possible time dependence between densities with the same maturity and for dependence across maturities at the same point in time. The assumptions on the prior distribution allow us to compound the needs of model flexibility, parameter parsimony and information pooling across densities.

Suggested Citation

  • Roberto Casarin & Fabrizio Leisen & German Molina & Enrique Ter Horst, 2014. "A Bayesian Beta Markov Random Field calibration of the term structure of implied risk neutral densities," Working Papers 2014:22, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2014:22
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian inference; Beta random fields; Exchange Metropolis Hastings; Markov chain Monte Carlo; Risk neutral measure.;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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