A service provided by the WU Library and the WU IT-Services

Risk-neutral density extraction from option prices. Improved pricing with mixture density networks.

Schittenkopf, Christian and Dorffner, Georg (2000) Risk-neutral density extraction from option prices. Improved pricing with mixture density networks. Report Series SFB "Adaptive Information Systems and Modelling in Economics and Management Science", 47. SFB Adaptive Information Systems and Modelling in Economics and Management Science, WU Vienna University of Economics and Business, Vienna.

[img]
Preview
PDF
Download (398Kb) | Preview

Abstract

One of the central goals in finance is to find better models for pricing and hedging financial derivatives such as call and put options. We present a semi-nonparametric approach to risk-neutral density extraction from option prices which is based on an extension of the concept of mixture density networks. The central idea is to model the shape of the risk-neutral density in a flexible, non-linear way as a function of the time horizon. Thereby, stylized facts such as negative skewness and excess kurtosis are captured. The approach is applied to a very large set of intraday options data on the FTSE 100 recorded at LIFFE. It is shown to yield significantly better results in terms of out-of-sample pricing in comparison to the basic Black-Scholes model and to an extended model adjusting the skewness and kurtosis terms. From the perspective of risk management, the extracted risk-neutral densities provide valuable information about market expectations. (author's abstract)

Item Type: Paper
Keywords: Optionspreistheorie / neuronales Netz
Divisions: Departments > Informationsverarbeitung u Prozessmanag. > Produktionsmanagement > Taudes
Departments > Finance, Accounting and Statistics > Statistics and Mathematics
Departments > Marketing > Service Marketing und Tourismus
Departments > Informationsverarbeitung u Prozessmanag. > Informationswirtschaft
Depositing User: Repository Administrator
Date Deposited: 08 Mar 2002 11:55
Last Modified: 15 Sep 2010 00:07
URI: http://epub.wu.ac.at/id/eprint/1682

Actions

View Item