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Working Paper

The Forecasting Performance of German Stock Option Densities

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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.
11.12.2003ISSN 2573-7953 WP 03-12DOI 10.26509/frbc-wp-200312
Keywords option prices, risk-neutral density, density evaluation, overlapping data
JEL Classification Codes C52, C22, G13, G15

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Craig, Ben R., 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. https://doi.org/10.26509/frbc-wp-200312