A Bayesian beta Markov random field calibration of the term structure of implied risk neutral densities

DOI10.1214/15-BA960SIMaRDI QIDQ273640zbMATH OpenOpenAlexFDO

Authors Roberto Casarin, Fabrizio Leisen, German Molina, Enrique ter Horst

Publication date 22 April 2016

Published in Bayesian Analysis (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1409.1956, https://projecteuclid.org/euclid.ba/1434980946

zbMATH Keywords

Bayesian inferencebeta Markov random fieldsdensity calibrationdistortion functionexchange Metropolis Hastingsrisk neutral measure

Mathematics Subject Classification ID

Bayesian inference (62F15) Derivative securities (option pricing, hedging, etc.) (91G20) Measures of association (correlation, canonical correlation, etc.) (62H20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70)

Abstract: We build on the work in Fackler and King 1990, and propose a more general calibration model for implied risk neutral densities. Our model allows for the joint calibration of a set of densities at different maturities and dates through a Bayesian dynamic Beta Markov Random Field. Our approach allows for possible time dependence between densities with the same maturity, and for dependence across maturities at the same point in time. This approach to the problem encompasses model flexibility, parameter parsimony and, more importantly, information pooling across densities.

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Cited in

(4)

• Bakshi, Kapadia, and Madan (2003) risk-neutral moment estimators: a Gram-Charlier density approach
• A class of risk neutral densities with heavy tails
• Bayesian Nonparametric Calibration and Combination of Predictive Distributions
• Bayesian Risk Measures for Derivatives via Random Esscher Transform

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