This paper introduces a new computational tool for the analysis of the risks embedded in a set of prices of European-style options. The software enables the estimation of the risk-neutral density (RND) from the observed option prices by means of orthogonal polynomial expansions. Orthogonal polynomials offer a viable alternative to more standard techniques based on interpolation and estimation of the second-order derivatives of option prices. The app rndfittool is available on GitHub and its usage is illustrated with examples based on real data.
Analyzing the Risks Embedded in Option Prices with rndfittool / Barletta, Andrea; Santucci de Magistris, Paolo. - In: RISKS. - ISSN 2227-9091. - 2(2018), pp. 1-15. [10.3390/risks6020028]
Analyzing the Risks Embedded in Option Prices with rndfittool
Paolo Santucci de Magistris
2018
Abstract
This paper introduces a new computational tool for the analysis of the risks embedded in a set of prices of European-style options. The software enables the estimation of the risk-neutral density (RND) from the observed option prices by means of orthogonal polynomial expansions. Orthogonal polynomials offer a viable alternative to more standard techniques based on interpolation and estimation of the second-order derivatives of option prices. The app rndfittool is available on GitHub and its usage is illustrated with examples based on real data.
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