Bayesian Analysis

A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities

Roberto Casarin, Fabrizio Leisen, German Molina, and Enrique ter Horst

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Abstract

We build on the derivative pricing calibration literature, and propose a more general calibration model for implied risk neutral densities. Our model allows for the joint calibration of a set of densities at different maturities and dates through a Bayesian dynamic Beta Markov Random Field. Our approach allows for possible time dependence between densities with the same maturity, and for dependence across maturities at the same point in time. This approach to the risk neutral density calibration problem encompasses model flexibility, parameter parsimony, and, more importantly, information pooling across densities. This proposed methodology can be naturally extended to other areas where multidimensional calibration is needed.

Article information

Source
Bayesian Anal., Volume 10, Number 4 (2015), 791-819.

Dates
First available in Project Euclid: 22 June 2015

Permanent link to this document
https://projecteuclid.org/euclid.ba/1434980946

Digital Object Identifier
doi:10.1214/15-BA960SI

Mathematical Reviews number (MathSciNet)
MR3432240

Zentralblatt MATH identifier
1334.62180

Keywords
Bayesian inference Beta Markov Random Fields exchange Metropolis Hastings risk neutral measure density calibration distortion function

Citation

Casarin, Roberto; Leisen, Fabrizio; Molina, German; ter Horst, Enrique. A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities. Bayesian Anal. 10 (2015), no. 4, 791--819. doi:10.1214/15-BA960SI. https://projecteuclid.org/euclid.ba/1434980946


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