English, Article, Journal or magazine article edition: Reading the Smile: The Message Conveyed by Methods Which Infer Risk Neutral Jondeau, E.; Rockinger, M.

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Bookmark: http://trove.nla.gov.au/version/147952
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Reading the Smile: The Message Conveyed by Methods Which Infer Risk Neutral
Author
  • Jondeau, E.
  • Rockinger, M.
Physical Description
  • preprint
Notes
  • In this study we compare the quality and information content of risk neutral densities obtained by various methods. We consider a non-parametric method based on a mixture of log-normal densities, the semi-parametric ones based on an Hermite approximation of Madan and Milne, or based on an Edgeworth expansion of Jarrow and Rudd, the parametric approach of Malz which assumes a jump-diffusion for the underlying process, and eventually Heston's approach assuming a stochastic volatility model. We apply those models on FRF/​DEM exchange rate options for two dates, for various maturities. Models differ when important news hit the market (here the 1997 snap elections). The non-parametric model provides a good fit to options prices but is unable under critical circumstances to provide as much information about market participants expectations than Malz's jump-diffusion model..
  • Risk neutral density ; Option pricing ; Exchange rate option.
  • RePEc:bfr:banfra:47
Language
  • English
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