The Forecasting Performance of German Stock Option Densities
34 Pages Posted: 1 Nov 2007
Date Written: November 2003
In this paper the authors estimate risk-neutral densities (RND) for the largest euro-area stock market (the index of which is the German DAX), reporting their statistical properties, and evaluating their forecasting performance. The authors have applied an innovative test procedure to a new, rich, and accurate data set. They have two main results. First, They have recorded strong negative skewness in the densities. Second, they find evidence for a significant difference between the actual density and the risk-neutral density, leading to the conclusion that market participants were surprised by the extent of both the rise and the fall of the DAX.
Keywords: option prices, risk-neutral density, density evaluation, overlapping data
JEL Classification: C52, C22, G13, G15
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