International evidence of the forecasting ability of option-implied distributions

Abstract

[eng] This paper analyzes the forecasting ability of option-implied distributions of12 stock indexes representative of the most relevant economic regions for along period ranging from 1996 to 2021. After performing alternative tests, therejection of the forecasting ability of the risk-neutral densi (RNDs) is not evi-dent, since results are mixed depending on the test performed and marketstudied: The forecasting ability of the RNDs of East Asian indexes as well asother smaller European economies cannot be discarded. In addition, subjective(actual) probability densit (SPDs) resulting from the risk adjustments of theRNDs using constanCRRA) preferences improve substantially the test results,leading to a general failure to reject their forecasting ability.