Inverse Learning of Latent Risk-Neutral Densities from Irregular Option Quotes
Abstract
Accurate option prices do not imply accurate recovery of the latent risk-neutral density. We study this distinction with two complementary benchmarks. A controlled benchmark exposes simulator-truth densities for latent evaluation, while a chronological NIFTY benchmark tests only held-out market prices. A two-component lognormal mixture has the lowest aggregate price, , Wasserstein, and fixed-tail errors on the synthetic benchmark. Learned operators retain narrower strengths: DeepONet reduces 1% quantile and variance error by 39.0% and 34.6% relative to the mixture, and a quote transformer reduces by 16.4% on the structurally misspecified Merton family. A numerical conditioning analysis explains why these rankings can differ: after enforcing mass and forward constraints, 95 of 126 pricing directions are numerically null, and two densities separated by produce identical prices on the covered strikes. On 524 held-out NIFTY calls, validation-selected test-time adaptation reduces DeepONet RMSE by 28.3%, but per-expiry mixture and SVI fits remain much more accurate. The evidence supports target-dependent inductive bias, not a universal winner.
Keywords
Cite
@article{arxiv.2607.27188,
title = {Inverse Learning of Latent Risk-Neutral Densities from Irregular Option Quotes},
author = {Lennon J. Shikhman and Michael Galarnyk and Aadi Dash and Nicholas A. Welsh},
journal= {arXiv preprint arXiv:2607.27188},
year = {2026}
}
Comments
7 pages, 4 figures, 2 tables. Submitted to the 7th ACM International Conference on AI in Finance (ICAIF 2026)