Announcement: Talk by Robert Tompkins
Date: 16.10.2001
Time: 17:30 (note: this is one hour later than the usual weekly seminar at
the Institute of Financial and Actuarial Mathematics)
Location: Vienna University of Technology, Freihaus, Turm A (green),
6th floor, Room 107
(see map at:
http://www.fam.tuwien.ac.at/schedule/)
Title of the talk: The relation between implied and realised probability
density functions
Abstract:
By Iliana Anagnou, Mascia Bedendo, Stewart Hodges and Robert Tompkins
A number of financial regulators [see Neuhaus (1995), Bahra (1996, 1997),
McManus (1999) and Shiratsuka (2001)] have suggested that risk neutral
densities (RND) associated with options markets could provide useful
indicators of future market turbulence. Critical to this assumption is
that such RNDs should provide an unbiased forecast of realised probability
density functions. To date, this assumption has not been fully examined.
In this research, we test the ability of RNDs for options on the S&P 500
and the British Pound / US Dollar to predict future probability densities.
We consider three approaches to estimate the RNDs, which are consistent
with approaches proposed and used by financial regulators. We also provide
a number of new testing procedures to assess the efficiency and unbiasness
of the forecasts. These tests provide more power than the usual
Komolgorov/Smirnov tests. Using non-overlapping quarterly data from the
mid 1980s to 2000, we find that we can reject the hypothesis that the RNDs
for both the S&P 500 and British Pounds are unbiased forecasts. Even with
a limited number of observations, the tests are powerful enough to allow
rejection. These results are consistent with Weinberg (2001) and are more
robust as this work relied upon the use of overlapping data. These
results tend to support the conclusions of Shiratsuka (2001), that RNDs
should not be used by financial regulators as financial indicators, and
that such use could prove counterproductive; actually increasing future
market turbulence rather than alleviating it.
Further information on other talks at the Institute of Financial and
Actuarial Mathematics can be found at
http://www.fam.tuwien.ac.at/schedule/
--
|christopher summer ||tu vienna, financial and actuarial mathematics
|tel +43 1 58801 10522 ||http://www.fam.tuwien.ac.at/~csummer
|fax +43 1 58801 10599 ||csummer(a)fam.tuwien.ac.at