Calibration of Option‐Based Probability Assessments in Agricultural Commodity Markets

Abstract

A method for evaluating the reliability of option-based price probability assessments is developed based on the calibration concept. Empirical tests using goodness-of-fit criteria are applied to four agricultural commodities. Results suggest that assessments in the com and live cattle markets are reliable, but such assessments overstate the volatility of soybean prices and understate the location of hog prices.

Closed-form Transformations from Risk-neutral to Real-world Distributions

“…However, the function C is unknown. Fackler and King (1990) recommend the c.d.f. of the Beta distribution as a candidate calibration function,…”

Option Pricing Under Time-Varying Risk-Aversion with Applications to Risk Forecasting

“…The calibration transformation was first proposed by Fackler and King [75], who correct a misspecified density by virtue of a calibration function. To understand the theoretical background of this approach, we follow Taylor [148, p. 455 f.] and first consider a random variable S T with cumulative distribution function (cdf) F .…”

Option pricing under time-varying risk-aversion with applications to risk forecasting

“…In order to correct a misspecified cdf, Fackler and King [75] propose to use a calibration function, which captures the actual distribution of the transformed random variable…”

“…Fackler and King [75] suggest to use the beta distribution as calibration function, which is defined as [148, p. 439 f.]…”