Risk neutral versus real-world distribution on puclicly listed bank corporations

Michel Dacorogna (1) , Juan-José Francisco Miguelez (2) , Marie Kratz (2, 3)

1 SCOR SE
2 ESSEC Business School
3 MAP5 - UMR 8145 - Mathématiques Appliquées Paris 5

In this study, we examine different quantitative methods to recover the risk neutral distribution function associated to the prices of option on bank shares. This is useful for a wide range of applications, such as determining the implicit State guarantee that systemic financial institutions benefit from the State, or looking if the market prices correctly the fat tails of financial returns. We assess the performance of these techniques in various ways, including comparing market option prices and historical Values-at-Risk to option prices and Value-at-Risk implied by the estimated risk neutral distribution. We find that, contrary to what is expected for a market composed of risk averse investors, the latter is much smaller than the one obtained from real data. We discuss our results with respect to the theory of risk neutral valuation and investor risk preference.

Mots clés: extremes; fat tail; option pricing; real world probability; risk neutral probability; SIFI; value-­at-­risk

Domaines: Gestion des risques [q-fin.RM]

Michel Dacorogna, Juan-José Francisco Miguelez, Marie Kratz. Risk neutral versus real-world distribution on puclicly listed bank corporations. 2016. ⟨hal-01373071⟩