International evidence of the forecasting ability of option‐implied distributions

Abstract

AbstractThis paper analyzes the forecasting ability of option‐implied distributions of 12 stock indexes representative of the most relevant economic regions for a long period ranging from 1996 to 2021. After performing alternative tests, the rejection of the forecasting ability of the risk‐neutral densi (RNDs) is not evident, since results are mixed depending on the test performed and market studied: The forecasting ability of the RNDs of East Asian indexes as well as other smaller European economies cannot be discarded. In addition, subjective (actual) probability densit (SPDs) resulting from the risk adjustments of the RNDs using constanCRRA) preferences improve substantially the test results, leading to a general failure to reject their forecasting ability.