• ISSN: 2301-3567 (Print), 2972-3981 (Online)
    • Abbreviated Title: J. Econ. Bus. Manag.
    • Frequency: Quarterly
    • DOI: 10.18178/JOEBM
    • Editor-in-Chief: Prof. Eunjin Hwang
    • Executive Editor: Ms. Fiona Chu
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HOME > Archive > 2022 > Volume 10 Number 5 (Oct. 2022) >
JOEBM 2022 Vol.10(5): 313-318 ISSN: 2301-3567
DOI: 10.18178/joebm.2022.10.5.718

Risk Neutral Density Estimation of Option Price from the Perspective of Empirical Analysis

Rui Ren and Rongchen Wang

Abstract—Options markets are evolutionary, and the risk-neutral density (RND) provides some insight into the market's perception of the future direction of the underlying index and risk. At the same time, the risk-neutral density is also an important tool for analyzing the dynamics of the financial market, the attitudes, and reactions of traders, the phenomena that have been experienced to shock the financial market, and some of the potential shocks. This study not only takes the Chinese options market as the research object and uses the smoothing implied volatility smile curve method to select the 50 most liquid ETF options, to estimate the risk-neutral density, but also finds the relationship between RND and macroeconomic announcements. Since the risk-neutral density is provided by the option price of a given asset at different strike prices at the same time, it can reflect the market's evaluation of the solvency probability of a series of option strike prices. The study find that the time of macroeconomic announcements and the good news make influence to change RND. The announcement and good news on variance and kurtosis have an opposite effect in both the volatile period and post-crash period.

Index Terms—SSE 50ETF option, risk neutral density, implied volatility, volatility smile curve.

Ren Rui is with Henan University of Economics and Law, Zhengzhou, Henan, China (e-mail: 847786246@qq.com). Wang Rongchen is with the University of Manchester in Oxford Road, Manchester, United Kingdom (e-mail: 1137751448@qq.com).

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Cite:Rui Ren and Rongchen Wang, "Risk Neutral Density Estimation of Option Price from the Perspective of Empirical Analysis," Journal of Economics, Business and Management vol. 10, no. 5, pp. 313-318, 2022.

Copyright © 2022 by the authors. This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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