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The Forecasting Performance of German Stock Option Densities


In this paper we will be estimating risk-neutral densities (RND) for the largest euro area stock market (the index of which is the German DAX), reporting their statistical properties, and evaluating their forecasting performance. We have applied an innovative test procedure to a new, rich, and accurate data set. We have two main results. First, we have recorded strong negative skewness in the densities. Second, we find evidence for significant difference between the actual density and the risk-neutral density, leading to the conclusion that market participants were surprised by the extent of both the rise and the fall of the DAX.

Keywords: option prices, risk-neutral density, density evaluation, overlapping data

JEL Codes: C52, C22, G13, G15


Suggested citation: Craig, Ben, Ernst Glatzer, Joachim Keller, and Martin Scheicher, 2003. "The Forecasting Performance of German Stock Option Densities,” Federal Reserve Bank of Cleveland, Working Paper, no. 03-12.

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