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A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices

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A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices. / Shackleton, M B; Taylor, S J; Yu, P.
In: Journal of Banking and Finance, Vol. 34, No. 11, 11.2010, p. 2678-2693.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

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Shackleton MB, Taylor SJ, Yu P. A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices. Journal of Banking and Finance. 2010 Nov;34(11):2678-2693. doi: 10.1016/j.jbankfin.2010.05.006

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Shackleton, M B ; Taylor, S J ; Yu, P. / A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices. In: Journal of Banking and Finance. 2010 ; Vol. 34, No. 11. pp. 2678-2693.

Bibtex

@article{5029d775e3ca422fab2facd78d872c80,
title = "A multi-horizon comparison of density forecasts for the S&P 500 using index returns and option prices",
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.",
keywords = "ARCH models, Density forecasts, Index options , Risk-neutral densities , Risk-transformations",
author = "Shackleton, {M B} and Taylor, {S J} and P Yu",
year = "2010",
month = nov,
doi = "10.1016/j.jbankfin.2010.05.006",
language = "English",
volume = "34",
pages = "2678--2693",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "11",

}

RIS

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 -