The Implied Risk Neutral Density Dynamics: Evidence from the S&P TSX 60 Index

Abstract

The risk neutral density is an important tool for analyzing the dynamics of financial markets and traders’ attitudes and reactions to already experienced shocks by financial markets as well as the potential ones. In this paper, we present a new method for the extraction information content from option prices. By eliminating bias caused by daily variation of contract maturity through a completely nonparametric technique based on kernel regression, we allow comparing evolution of risk neutral density and extracting from time continuous indicators that detect evolution of traders’ attitudes, risk perception, and belief homogeneity. This method is useful to develop trading strategies and monetary policies.