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.
Barletta, Andrea; Santucci de Magistris, Paolo. (2018). Analyzing the Risks Embedded in Option Prices with rndfittool. RISKS, (ISSN: 2227-9091),2, 1-15. Doi: 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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