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Impact of the Corporate Governance on the Financial Performance of Insurance Companies in the Slovak and Czech Republics Read chapter Read first chapter

2020 | OriginalPaper | Chapter

4. Risk-Neutral Densities and Their Application in the Piterbarg Framework

Authors : Alexis Levendis, Pierre Venter

Published in: Advances in Cross-Section Data Methods in Applied Economic Research

Publisher: Springer International Publishing

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Abstract

In this paper, we consider two well-known interpolation schemes for the construction of the JSE Shareholder Weighted Top 40 implied volatility surface. We extend the Breeden and Litzenberger formula to the derivative pricing framework developed by Piterbarg post the 2007 financial crisis. Our results show that the statistical moments of the constructed risk-neutral densities are highly dependent on the choice of interpolation scheme. We show how the risk-neutral density surface can be used to price options and briefly describe how the statistical moments can be used to inform trading strategies.

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Literature
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Hull, J.C. (2008). Options, futures and other derivatives (7th ed.). Prentice Hall
Kahalé, N. (2004). An arbitrage-free interpolation of volatilities. Risk, 17(5), 102–106.
Levendis, A., & Venter, P. (2019). Implementation of local volatility in Piterbarg’s framework. In Paper submitted to international conference on applied economics 2019.
Piterbarg, V. (2010). Funding beyond discounting: collateral agreements and derivatives pricing. Risk Magazine, 23(2), 97–102.
Ross, S. (2015). The recovery theorem. The Journal of Finance, 70(2), 615–648.CrossRef
von Boetticher, S.T. (2017). The Piterbarg framework for option pricing. Ph.D. diss.
Metadata
Title
Risk-Neutral Densities and Their Application in the Piterbarg Framework
Authors
Alexis Levendis
Pierre Venter
Copyright Year
2020
Book
Advances in Cross-Section Data Methods in Applied Economic Research

Print ISBN: 978-3-030-38252-0

Electronic ISBN: 978-3-030-38253-7

Copyright Year: 2020

DOI
https://doi.org/10.1007/978-3-030-38253-7_4

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