Title: On the forecasting ability of option implied risk-neutral distributions
Authors: Maria Magdalena Vich Llompart - University of Balearic Islands (Spain) [presenting]
Antoni Vaello Sebastia - University of Balearic Islands (Spain)
Abstract: The forecasting ability of risk-neutral densities (RNDs) estimated using either parametric (mixture of two Log-Normal distributions) and non-parametric methods (kernel and splines) for different time horizons is analyzed. Traditional tests for the forecasting ability rely on restrictive assumptions (mainly normality and independence). In order to overcome these problems, we calculate block-bootstrap-based critical values. We consider RNDs on three US indexes, S\&P500, Nasdaq 100 and Russell 2000 for a long series of data, ranging from 1996 to 2015, which is of special interest since it encompasses two major crisis. Differently to existent literature, our results conclude failure to reject their forecasting ability, being these results consistent across the different indexes and methodologies. We also analyze the fit of the tails of the RNDs separately, finding that, in general, they tend to overestimate the frequency of occurrence of events in the left tail (losses).