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:
Journal Article
Journal or Publication Title:
Journal of Banking and Finance
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/aacsb/disciplinebasedresearch
Subjects:
ID Code:
45542
Deposited By:
Deposited On:
11 Jul 2011 18:33
Refereed?:
Yes
Published?:
Published
Last Modified:
26 Sep 2020 02:05