%0 Journal Article
%T Recovering Risk-Neutral Densities from Brazilian Interest Rate Options
%A Jos¨¦ Renato Haas Ornelas
%A Marcelo Yoshio Takami
%J Revista Brasileira de Finan£¿as
%D 2011
%I Brazilian Society of Finance
%X Building Risk-Neutral Density (RND) from options data is one useful way for extracting market expectations about a financial variable. For a sample of IDI (Brazilian Interbank Deposit Rate Index) options from 1998 to 2009, this paper estimates the option-implied Risk-Neutral Densities for the Brazilian short rate using three methods: Shimko, Mixture of Two Log-Normals and Generalized Beta of Second Kind. Our in-sample goodness-of-fit evaluation shows that the Mixture of Log-Normals method provides better fitting to option¡¯s data than the other two methods. The shape of log-normal distributions seems to fit well to the mean-reversal dynamics of Brazilian interest rates. We have also calculated the RND implied Skewness, showing how it could have provided market early-warning signals of the monetary policy outcomes in 2002 and 2003. Overall, Risk-Neutral Densities implied on IDI options showed to be a useful tool for extracting market expectations about future outcomes of the monetary policy.
%K Risk-Neutral Density
%K Interest Rate Options
%K Generalized Beta
%K Mixture of Log-Normals
%U http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/2761/2158