What moves the tail? The determinants of the option-implied probability density function of the DAX index

✍ Scribed by Ernst Glatzer; Martin Scheicher

• Publisher: John Wiley and Sons
• Year: 2005
• Tongue: English
• Weight: 234 KB
• Volume: 25
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20157

✦ Synopsis

In this article a study of the option-implied probability density function (PDF) of German stock returns is presented. The use of option prices allows for the quantification of the risk-neutral probability of large movements in the DAX index. Using daily data for the period from December 1995 to May 2002, the mixture of log-normals specification with a constant maturity of 49 days is estimated. The time series behavior of the option-implied PDF during episodes of market turbulence is discussed at the outset. The main purpose of the study is to consider the relationship of This paper was presented at the European Central Bank, the Bank for International Settlements, Humboldt -Universität, and Oesterreichische Nationalbank. We are grateful to Claudio Borio, Eli Remolona, Harald Uhlig, and Christian Upper for their helpful comments. The opinions in this paper do not necessarily reflect those of the OeNB or the ECB.