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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices
AU - Shackleton, M B
AU - Taylor, S J
AU - Yu, P
PY - 2010/11
Y1 - 2010/11
N2 - 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.
AB - 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.
KW - ARCH models
KW - Density forecasts
KW - Index options
KW - Risk-neutral densities
KW - Risk-transformations
U2 - 10.1016/j.jbankfin.2010.05.006
DO - 10.1016/j.jbankfin.2010.05.006
M3 - Journal article
VL - 34
SP - 2678
EP - 2693
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
IS - 11
ER -