An analysis of risk-neutral density’s moments for USD/BRL options with applications to trading

• Autor(a) principal: Mendonça, Gustavo Passebon
• Data de Publicação: 2019
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: https://hdl.handle.net/10438/27885
• topic: Risk-neutral density; Implied volatility smile; USD/BRL options; Generalized extreme value; Mixture of log-normal densities; Generalized beta of second kind; Futures trading; Densidade neutra ao risco; Volatilidade implícita; Opções de USD/BRL; Distribuição generalizada de valores extremos; Mistura de densidades log-normais; Distribuição generalizada beta de segundo tipo; Trading de futuros; Economia; Mercado de opções - Preços; Taxas de câmbio; Teoria dos valores extremos; Probabilidades; Negociação de futuros

The present work proposes an application of a non-parametric methodology to extract the risk-neutral probability density function (RND) to USD/BRL options. This methodology consists in complementing the RND extracted from the implied volatility smile with tails drawn from a GEV (generalized extreme value) distribution. These non-parametrics riskneutral densities are compared to parametric distributions that are frequently mentioned in the literature - specifically, the mixture of log-normal densities (MLN) and the generalized beta of second kind (GB2) - through a study of their moments. The present work proposes a straightforward methodology to apply the estimated moments for trading of USD/BRL futures, finding strategies that produce greater returns relative to a simple buy and hold strategy.