A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities

28 Pages Posted: 9 Dec 2014

See all articles by Roberto Casarin

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics

Fabrizio Leisen

University of Kent - Canterbury Campus

German Molina

Idalion Capital US LP

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration

Date Written: December 4, 2014

Abstract

We build on Fackler and King (1990) and propose a general calibration model for implied risk neutral densities. Our model allows for the joint calibration of a set of densities at different maturities and dates. The model is a Bayesian dynamic beta Markov random field which allows for possible time dependence between densities with the same maturity and for dependence across maturities at the same point in time. The assumptions on the prior distribution allow us to compound the needs of model flexibility, parameter parsimony and information pooling across densities.

Keywords: Bayesian inference, Beta random fields, Exchange Metropolis Hastings, Markov chain Monte Carlo, Risk neutral measure

JEL Classification: C11, C15, C33, C51, C58, G13, G17

Suggested Citation

Casarin, Roberto and Leisen, Fabrizio and Molina, German and ter Horst, Enrique, A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities (December 4, 2014). Ca' Foscari University of Venice Department of Economics Working Paper No. 22/WP/2014, Available at SSRN: https://ssrn.com/abstract=2535281 or http://dx.doi.org/10.2139/ssrn.2535281

Roberto Casarin (Contact Author)

University Ca' Foscari of Venice - Department of Economics ( email )

San Giobbe 873/b
Venice, 30121
Italy
+39 030.298.91.49 (Phone)
+39 030.298.88.37 (Fax)

HOME PAGE: http://sites.google.com/view/robertocasarin

Fabrizio Leisen

University of Kent - Canterbury Campus ( email )

Cornwallis Building
Canterbury, Kent CT2 7NF
United Kingdom

German Molina

Idalion Capital US LP ( email )

2711 Centerville Rd Ste 400
Wilmington, DE 19808
United States

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration ( email )

Bogota
Colombia

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