Empirical performance of interpolation techniques in risk-neutral density (RND) estimation

Bahaludin, Hafizah and Abdullah, Mimi Hafizah (2017) Empirical performance of interpolation techniques in risk-neutral density (RND) estimation. In: 37th International Conference on Quantum Probability and Related Topics, QP 2016; Faculty of Science of the International Islamic University MalaysiaKuantan; Malaysia, 22-26 August 2016, International Islamic University Malaysia, Kuantan Pahang.

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Abstract

The objective of this study is to evaluate the empirical performance of interpolation techniques in risk-neutral density (RND) estimation. Firstly, the empirical performance is evaluated by using statistical analysis based on the implied mean and the implied variance of RND. Secondly, the interpolation performance is measured based on pricing error. We propose using the leave-one-out cross-validation (LOOCV) pricing error for interpolation selection purposes. The statistical analyses indicate that there are statistical differences between the interpolation techniques:second-order polynomial, fourth-order polynomial and smoothing spline. The results of LOOCV pricing error shows that interpolation by using fourth-order polynomial provides the best fitting to option prices in which it has the lowest value error.

Item Type:	Conference or Workshop Item (Plenary Papers)
Additional Information:	4482/57287
Uncontrolled Keywords:	Empirical performanceF; Fourth order polynomial; Interpolation techniques; Leave-one-out cross-validation (LOOCV); Risk neutrals; Second-order polynomial; Smoothing spline; Statistical differences
Subjects:	Q Science > Q Science (General) Q Science > QA Mathematics Q Science > QC Physics
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science Kulliyyah of Science > Department of Computational and Theoretical Sciences
Depositing User:	Ms Mimi Hafizah Abdullah
Date Deposited:	15 Jun 2017 09:06
Last Modified:	30 Sep 2019 12:25
URI:	http://irep.iium.edu.my/id/eprint/57287

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