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A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices

Shackleton, M B and Taylor, S J and Yu, P (2010) A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices. Journal of Banking and Finance, 34 (11). pp. 2678-2693. ISSN 0378-4266

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    Abstract

    We compare density forecasts of the S&P 500 index from 1991 to 2004, obtained from option prices and daily and 5-min index returns. Risk-neutral densities are given by using option prices to estimate diffusion and jump-diffusion processes which incorporate stochastic volatility. Three transformations are then used to obtain real-world densities. These densities are compared with historical densities defined by ARCH models. For horizons of two and four weeks the best forecasts are obtained from risk-transformations of the risk-neutral densities, while the historical forecasts are superior for the one-day horizon; our ranking criterion is the out-of-sample likelihood of observed index levels. Mixtures of the real-world and historical densities have higher likelihoods than both components for short forecast horizons.

    Item Type: Article
    Journal or Publication Title: Journal of Banking and Finance
    Uncontrolled Keywords: ARCH models ; Density forecasts ; Index options ; Risk-neutral densities ; Risk-transformations
    Subjects: H Social Sciences > HG Finance
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 45542
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:33
    Refereed?: Yes
    Published?: Published
    Last Modified: 19 Dec 2013 16:43
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/45542

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