Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar
This research paper presents statistical comparisons between two methods that are commonly used to estimate option implied Risk-Neutral Densities (RND). These are: 1) mixture of lognormals (MXL); and, 2) volatility function technique (VFT). The former is a parametric method whilst the latter is a no...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Universidad Autónoma de Nuevo León, Facultad de Economía
2008-05-01
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| Series: | Ensayos Revista de Economía |
| Subjects: | |
| Online Access: | http://ensayos.uanl.mx/index.php/ensayos/article/view/104 |
| _version_ | 1819087865958629376 |
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| author | Guillermo Benavides Perales Israel Felipe Mora Cuevas |
| author_facet | Guillermo Benavides Perales Israel Felipe Mora Cuevas |
| author_sort | Guillermo Benavides Perales |
| collection | DOAJ |
| description | This research paper presents statistical comparisons between two methods that are commonly used to estimate option implied Risk-Neutral Densities (RND). These are: 1) mixture of lognormals (MXL); and, 2) volatility function technique (VFT). The former is a parametric method whilst the latter is a non-parametric approach. The RNDs are extracted from over-thecounter European-style options on the Mexican Peso–US Dollar exchange rate. The non-parametric method was the superior one for out-of-sample evaluations. The implied mean, median and mode were, in general, statistically different between the competing approaches. It is recommended to apply the VFT instead of the MXL given that the former has superior accuracy and it can be estimated when there is a relatively short crosssection of option exercise price range. The results have implications for financial investors and policy makers given that they could use the information content in options to analyze market’s perceptions about the future expected variability of the financial asset under study.
Clasificación JEL: C14, C52, F31, G13. |
| first_indexed | 2024-12-21T21:42:57Z |
| format | Article |
| id | doaj.art-9be2602d976c4bad96d55d1f88022580 |
| institution | Directory Open Access Journal |
| issn | 1870-221X 2448-8402 |
| language | English |
| last_indexed | 2024-12-21T21:42:57Z |
| publishDate | 2008-05-01 |
| publisher | Universidad Autónoma de Nuevo León, Facultad de Economía |
| record_format | Article |
| series | Ensayos Revista de Economía |
| spelling | doaj.art-9be2602d976c4bad96d55d1f880225802022-12-21T18:49:18ZengUniversidad Autónoma de Nuevo León, Facultad de EconomíaEnsayos Revista de Economía1870-221X2448-84022008-05-0127182Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollarGuillermo Benavides PeralesIsrael Felipe Mora CuevasThis research paper presents statistical comparisons between two methods that are commonly used to estimate option implied Risk-Neutral Densities (RND). These are: 1) mixture of lognormals (MXL); and, 2) volatility function technique (VFT). The former is a parametric method whilst the latter is a non-parametric approach. The RNDs are extracted from over-thecounter European-style options on the Mexican Peso–US Dollar exchange rate. The non-parametric method was the superior one for out-of-sample evaluations. The implied mean, median and mode were, in general, statistically different between the competing approaches. It is recommended to apply the VFT instead of the MXL given that the former has superior accuracy and it can be estimated when there is a relatively short crosssection of option exercise price range. The results have implications for financial investors and policy makers given that they could use the information content in options to analyze market’s perceptions about the future expected variability of the financial asset under study. Clasificación JEL: C14, C52, F31, G13.http://ensayos.uanl.mx/index.php/ensayos/article/view/104currency option implied volatilityexchange rateparametric methodsnon-parametric methodsrisk-neutral densities. |
| spellingShingle | Guillermo Benavides Perales Israel Felipe Mora Cuevas Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar Ensayos Revista de Economía currency option implied volatility exchange rate parametric methods non-parametric methods risk-neutral densities. |
| title | Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar |
| title_full | Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar |
| title_fullStr | Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar |
| title_full_unstemmed | Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar |
| title_short | Parametric vs. non-parametric methods for estimating option implied risk-neutral densities: the case of the exchange rate Mexican peso – US dollar |
| title_sort | parametric vs non parametric methods for estimating option implied risk neutral densities the case of the exchange rate mexican peso us dollar |
| topic | currency option implied volatility exchange rate parametric methods non-parametric methods risk-neutral densities. |
| url | http://ensayos.uanl.mx/index.php/ensayos/article/view/104 |
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