Using a no-arbitrage condition we develop a nonparametric technique to extract the risk-neutral distribution of both asset returns and instantaneous volatilities from plain vanilla option prices. Our technique extends existing approaches that lead to risk-neutral return distributions only. In order to estimate the risk-neutral volatility distribution, we do not need to that derivatives on volatility are traded. More generally, as our method yields a nonparametric estimate of the joint risk-neutral return/volatilitydistribution, we can also estimate conditional distributions of returns given future volatility levels. This opens the possibility to answer several important questions on risk-neutral volatility distributions and, thus, volatility risk premiums. Using S&P-500 data, we confirm negative volatility risk premiums and a right-shift in the future volatility distribution for higher initial volatility levels, but find additionally positive risk-neutral volatility skewness. Moreover, volatility skewness is more pronounced inlow volatility periods. This is consistent with a large aversion towards unexpected positive volatility shocks. With respect to the risk-neutral return distribution, we confirm overall negative skewness, but find that conditionally on decreasing volatility levels, the negative return skewness disappears. Concerning the risk-neutral dependence between return and volatility, we confirm that this dependence is negative. Compared to parametric models, we find that risk-neutral volatility of volatility is much smaller thanpredicted by the popular Heston (1993) model. This indicates the necessity of a jump component in the risk-neutral return process. Furthermore, the risk-neutral volatility of volatility cannot be described by a single di®usion risk-neutral volatility process.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2023-2027           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

B20231704_DNB_Blacklogo
svb
B20211216_shell download
B20160708_uva
B20200924_Ortec Finance logo 250px_banner_small
Bekijk al onze partners