Recovering Risk-Neutral Densities from Brazilian Interest Rate Options
Building Risk-Neutral Density (RND) from options data is one useful way for extracting market expectations about a financial variable. For a sample of IDI (Brazilian Interbank Deposit Rate Index) options from 1998 to 2009, this paper estimates the option-implied Risk-Neutral Densities for the Brazil...
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| Format: | Article |
| Language: | English |
| Published: |
Brazilian Society of Finance
2011-03-01
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| Series: | Revista Brasileira de Finanças |
| Subjects: | |
| Online Access: | http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/2761/2158 |
| _version_ | 1819230515578798080 |
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| author | José Renato Haas Ornelas Marcelo Yoshio Takami |
| author_facet | José Renato Haas Ornelas Marcelo Yoshio Takami |
| author_sort | José Renato Haas Ornelas |
| collection | DOAJ |
| description | Building Risk-Neutral Density (RND) from options data is one useful way for extracting market expectations about a financial variable. For a sample of IDI (Brazilian Interbank Deposit Rate Index) options from 1998 to 2009, this paper estimates the option-implied Risk-Neutral Densities for the Brazilian short rate using three methods: Shimko, Mixture of Two Log-Normals and Generalized Beta of Second Kind. Our in-sample goodness-of-fit evaluation shows that the Mixture of Log-Normals method provides better fitting to option’s data than the other two methods. The shape of log-normal distributions seems to fit well to the mean-reversal dynamics of Brazilian interest rates. We have also calculated the RND implied Skewness, showing how it could have provided market early-warning signals of the monetary policy outcomes in 2002 and 2003. Overall, Risk-Neutral Densities implied on IDI options showed to be a useful tool for extracting market expectations about future outcomes of the monetary policy. |
| first_indexed | 2024-12-23T11:30:18Z |
| format | Article |
| id | doaj.art-c55014fbe4234891a4244bf68b39e206 |
| institution | Directory Open Access Journal |
| issn | 1679-0731 1984-5146 |
| language | English |
| last_indexed | 2024-12-23T11:30:18Z |
| publishDate | 2011-03-01 |
| publisher | Brazilian Society of Finance |
| record_format | Article |
| series | Revista Brasileira de Finanças |
| spelling | doaj.art-c55014fbe4234891a4244bf68b39e2062022-12-21T17:48:49ZengBrazilian Society of FinanceRevista Brasileira de Finanças1679-07311984-51462011-03-0191926Recovering Risk-Neutral Densities from Brazilian Interest Rate OptionsJosé Renato Haas OrnelasMarcelo Yoshio TakamiBuilding Risk-Neutral Density (RND) from options data is one useful way for extracting market expectations about a financial variable. For a sample of IDI (Brazilian Interbank Deposit Rate Index) options from 1998 to 2009, this paper estimates the option-implied Risk-Neutral Densities for the Brazilian short rate using three methods: Shimko, Mixture of Two Log-Normals and Generalized Beta of Second Kind. Our in-sample goodness-of-fit evaluation shows that the Mixture of Log-Normals method provides better fitting to option’s data than the other two methods. The shape of log-normal distributions seems to fit well to the mean-reversal dynamics of Brazilian interest rates. We have also calculated the RND implied Skewness, showing how it could have provided market early-warning signals of the monetary policy outcomes in 2002 and 2003. Overall, Risk-Neutral Densities implied on IDI options showed to be a useful tool for extracting market expectations about future outcomes of the monetary policy.http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/2761/2158Risk-Neutral DensityInterest Rate OptionsGeneralized BetaMixture of Log-Normals |
| spellingShingle | José Renato Haas Ornelas Marcelo Yoshio Takami Recovering Risk-Neutral Densities from Brazilian Interest Rate Options Revista Brasileira de Finanças Risk-Neutral Density Interest Rate Options Generalized Beta Mixture of Log-Normals |
| title | Recovering Risk-Neutral Densities from Brazilian Interest Rate Options |
| title_full | Recovering Risk-Neutral Densities from Brazilian Interest Rate Options |
| title_fullStr | Recovering Risk-Neutral Densities from Brazilian Interest Rate Options |
| title_full_unstemmed | Recovering Risk-Neutral Densities from Brazilian Interest Rate Options |
| title_short | Recovering Risk-Neutral Densities from Brazilian Interest Rate Options |
| title_sort | recovering risk neutral densities from brazilian interest rate options |
| topic | Risk-Neutral Density Interest Rate Options Generalized Beta Mixture of Log-Normals |
| url | http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/2761/2158 |
| work_keys_str_mv | AT joserenatohaasornelas recoveringriskneutraldensitiesfrombrazilianinterestrateoptions AT marceloyoshiotakami recoveringriskneutraldensitiesfrombrazilianinterestrateoptions |