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Density Forecast Comparisons for Stock Prices, Obtained from High-Frequency Returns and Daily Option Prices

45 Pages Posted: 13 Dec 2015 Last revised: 29 Mar 2017

Rui Fan

Swansea University

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

Matteo Sandri

Lancaster University Management School

Date Written: March 13, 2017

Abstract

This paper presents the first comparison of the accuracy of density forecasts for stock prices. Six sets of forecasts are evaluated for DJIA stocks, across four forecast horizons. Two forecasts are risk-neutral densities implied by the Black-Scholes and Heston models. The third set are historical lognormal densities with dispersion determined by forecasts of realized variances obtained from 5-minute returns. Three further sets are defined by transforming risk-neutral and historical densities into real-world densities. The most accurate method applies the risk transformation to the Black-Scholes densities. This method outperforms all others for 87% of the comparisons made using the likelihood criterion.

Keywords: HAR models, density forecasts, stock options, high-frequency prices, risk-neutral densities, risk-transformations

JEL Classification: C14, C22, C53, G13

Suggested Citation

Fan, Rui and Taylor, Stephen J. and Sandri, Matteo, Density Forecast Comparisons for Stock Prices, Obtained from High-Frequency Returns and Daily Option Prices (March 13, 2017). Available at SSRN: https://ssrn.com/abstract=2702759 or http://dx.doi.org/10.2139/ssrn.2702759

Rui Fan (Contact Author)

Swansea University

School of Management
Swansea, Wales SA1 8EN
United Kingdom

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/afasjt

Matteo Sandri

Lancaster University Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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