Dynamic Modeling and Prediction of Risk Neutral Densities

Mathematical Finance/Financial Engineering Seminar
Wednesday, September 21, 2011 - 15:05
1 hour (actually 50 minutes)
Instr. Center 111
Department of Statistics, Rutgers University

Hosted by Christian Houdre and Liang Peng

Risk neutral density is extensively used in option pricing and risk management in finance. It is often implied using observed option prices through a complex nonlinear relationship. In this study, we model the dynamic structure of risk neutral density through time, investigate modeling approach, estimation method and prediction performances. State space models, Kalman filter and sequential Monte Carlo methods are used. Simulation and real data examples are presented.