Extracting Risk-Neutral Density and Its Moments from American Option Prices

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ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Extracting Risk-Neutral Density and Its Moments from American Option Prices by : Yisong S. Tian

Download or read book Extracting Risk-Neutral Density and Its Moments from American Option Prices written by Yisong S. Tian and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: There has been a surge in the use of option-implied moments (e.g., volatility, skewness and kurtosis) in various empirical applications such as volatility forecasting, variance risk premium, empirical asset pricing, and portfolio selection. One potential obstacle in such applications is the requirement of European option prices in the estimation of these moments. In this paper, we develop a simple, accurate method for extracting risk-neutral density and its moments from American option prices. A key advantage of our approach is that a single implied binomial tree is constructed to fit all American option prices, utilizing the full information set in the entire options market. Since American options are more commonly traded than European options, our methodology expands the scope of research on option-implied density and moments to a much wider class of underlying assets (e.g., equity and futures options).

Retrieving Risk Neutral Moments and Expected Quadratic Variation from Option Prices

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ISBN 13 :
Total Pages : 68 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Retrieving Risk Neutral Moments and Expected Quadratic Variation from Option Prices by : Leonidas Rompolis

Download or read book Retrieving Risk Neutral Moments and Expected Quadratic Variation from Option Prices written by Leonidas Rompolis and published by . This book was released on 2017 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives exact formulas for retrieving risk neutral moments of future payoffs of any order from generic European-style option prices. It also provides an exact formula for retrieving the expected quadratic variation of the stock market implied by European option prices, which nowadays is used as an estimate of the implied volatility, and a formula approximating the jump component of this measure of variation. To implement the above formulas to discrete sets of option prices, the paper suggests a numerical procedure and provides upper bounds of its approximation errors. The performance of this procedure is evaluated through a simulation and an empirical exercise. Both of these exercises clearly indicate that the suggested numerical procedure can provide accurate estimates of the risk neutral moments, over different horizons ahead. These can be in turn employed to obtain accurate estimates of risk neutral densities and calculate option prices, efficiently, in a model-free manner. The paper also shows that, in contrast to the prevailing view, ignoring the jump component of the underlying asset can lead to seriously biased estimates of the new volatility index suggested by the Chicago Board Options Exchange (CBOE).

Are We Extracting the True Risk Neutral Density from Option Prices? A Question with No Easy Answer

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ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Are We Extracting the True Risk Neutral Density from Option Prices? A Question with No Easy Answer by : James Huang

Download or read book Are We Extracting the True Risk Neutral Density from Option Prices? A Question with No Easy Answer written by James Huang and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we raise a question on the theoretical foundation of option implied risk neutral density. We prove that given any number of options, there exist numerous risk neutral densities which are piecewise constant, have only two values, either an lower bound or an upper bound on the true risk neutral density, and price all these options correctly. We also prove that given any number of options, there exist numerous risk neutral densities consistent with the prices of all these options whose first derivatives are piecewise constant and have only two values, either an lower bound or an upper bound on the true risk neutral density's first derivative. Similar results are proved with respect to the true risk neutral density's higher order derivatives. These results show how large errors we can make when extracting RNDs from option prices.

Option-Implied Risk-Neutral Distributions and Risk Aversion

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ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (95 download)

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Book Synopsis Option-Implied Risk-Neutral Distributions and Risk Aversion by : Jens Carsten Jackwerth

Download or read book Option-Implied Risk-Neutral Distributions and Risk Aversion written by Jens Carsten Jackwerth and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Risk-Neutral Densities

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ISBN 13 :
Total Pages : 61 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Risk-Neutral Densities by : Stephen Figlewski

Download or read book Risk-Neutral Densities written by Stephen Figlewski and published by . This book was released on 2018 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk neutral probability density (RND) over the underlying price at expiration. The RND contains investors' beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With particular focus on U.S. equity options, this article reviews the historical development of this powerful concept, practical details of fitting an RND to option market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I touch on areas of active current research including the "pricing kernel puzzle" and the "volatility surface," and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.

Essays in Honor of Joon Y. Park

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Publisher : Emerald Group Publishing
ISBN 13 : 1837532125
Total Pages : 449 pages
Book Rating : 4.8/5 (375 download)

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Book Synopsis Essays in Honor of Joon Y. Park by : Yoosoon Chang

Download or read book Essays in Honor of Joon Y. Park written by Yoosoon Chang and published by Emerald Group Publishing. This book was released on 2023-04-24 with total page 449 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volumes 45a and 45b of Advances in Econometrics honor Professor Joon Y. Park, who has made numerous and substantive contributions to the field of econometrics over a career spanning four decades since the 1980s and counting.

Option Pricing Models and Volatility Using Excel-VBA

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Publisher : John Wiley & Sons
ISBN 13 : 1118429206
Total Pages : 456 pages
Book Rating : 4.1/5 (184 download)

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Book Synopsis Option Pricing Models and Volatility Using Excel-VBA by : Fabrice D. Rouah

Download or read book Option Pricing Models and Volatility Using Excel-VBA written by Fabrice D. Rouah and published by John Wiley & Sons. This book was released on 2012-06-15 with total page 456 pages. Available in PDF, EPUB and Kindle. Book excerpt: This comprehensive guide offers traders, quants, and students the tools and techniques for using advanced models for pricing options. The accompanying website includes data files, such as options prices, stock prices, or index prices, as well as all of the codes needed to use the option and volatility models described in the book. Praise for Option Pricing Models & Volatility Using Excel-VBA "Excel is already a great pedagogical tool for teaching option valuation and risk management. But the VBA routines in this book elevate Excel to an industrial-strength financial engineering toolbox. I have no doubt that it will become hugely successful as a reference for option traders and risk managers." —Peter Christoffersen, Associate Professor of Finance, Desautels Faculty of Management, McGill University "This book is filled with methodology and techniques on how to implement option pricing and volatility models in VBA. The book takes an in-depth look into how to implement the Heston and Heston and Nandi models and includes an entire chapter on parameter estimation, but this is just the tip of the iceberg. Everyone interested in derivatives should have this book in their personal library." —Espen Gaarder Haug, option trader, philosopher, and author of Derivatives Models on Models "I am impressed. This is an important book because it is the first book to cover the modern generation of option models, including stochastic volatility and GARCH." —Steven L. Heston, Assistant Professor of Finance, R.H. Smith School of Business, University of Maryland

Risk Neutral Probabilities and Option Bounds

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ISBN 13 :
Total Pages : 58 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Risk Neutral Probabilities and Option Bounds by : James Huang

Download or read book Risk Neutral Probabilities and Option Bounds written by James Huang and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds when the maximum value of the risk neutral density is known. The method present in this paper has wide applications in option pricing problems.

Volatility and Time Series Econometrics

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Publisher : Oxford University Press
ISBN 13 : 0199549494
Total Pages : 432 pages
Book Rating : 4.1/5 (995 download)

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Book Synopsis Volatility and Time Series Econometrics by : Mark Watson

Download or read book Volatility and Time Series Econometrics written by Mark Watson and published by Oxford University Press. This book was released on 2010-02-11 with total page 432 pages. Available in PDF, EPUB and Kindle. Book excerpt: A volume that celebrates and develops the work of Nobel Laureate Robert Engle, it includes original contributions from some of the world's leading econometricians that further Engle's work in time series economics

Financial Modeling Under Non-Gaussian Distributions

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Publisher : Springer Science & Business Media
ISBN 13 : 1846286964
Total Pages : 541 pages
Book Rating : 4.8/5 (462 download)

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Book Synopsis Financial Modeling Under Non-Gaussian Distributions by : Eric Jondeau

Download or read book Financial Modeling Under Non-Gaussian Distributions written by Eric Jondeau and published by Springer Science & Business Media. This book was released on 2007-04-05 with total page 541 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book examines non-Gaussian distributions. It addresses the causes and consequences of non-normality and time dependency in both asset returns and option prices. The book is written for non-mathematicians who want to model financial market prices so the emphasis throughout is on practice. There are abundant empirical illustrations of the models and techniques described, many of which could be equally applied to other financial time series.

Recovering Risk-Neutral Densities

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ISBN 13 :
Total Pages : 61 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Recovering Risk-Neutral Densities by : Oleg Bondarenko

Download or read book Recovering Risk-Neutral Densities written by Oleg Bondarenko and published by . This book was released on 2008 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a novel nonparametric method to recover the implied risk-neutral density (RND) from option prices. The main advantages of this method are that it 1) is almost completely agnostic about the true underlying process, 2) controls against overfitting while allowing for small samples, 3) always results in sensible arbitrage-free distributions, 4) estimates the RND over the observable range of strikes only, without involving any extrapolation of density in the tails, 5) is computationally very simple, and 6) can be used to estimate multivariate RNDs. In an empirical application, the new method is implemented on the Samp;P Index options data over the period from 1991 to 1995. To characterize shapes of the Index's RNDs the paper uses the percentile moments which overcome unobservability of the tails of a distribution. The implied RNDs exhibit persistent negative skewness and excessive peakedness. The departures from lognormality become more pronounced as option maturity increases. Day-to-day variation of the RNDs is found to be related to the recent performance of the Index. In particular, on trading days when the Index declines the implied RNDs are more skewed and peaked than when the Index advances. Finally, the implied probabilities of extreme outcomes are also estimated.

Implied Exchange Rate Distributions

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ISBN 13 :
Total Pages : 64 pages
Book Rating : 4.:/5 (318 download)

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Book Synopsis Implied Exchange Rate Distributions by : José Campa

Download or read book Implied Exchange Rate Distributions written by José Campa and published by . This book was released on 1997 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses a rich new data set of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of one and three months. We compare three alternative smoothing methods--cubic splines, an implied binomial tree (trimmed and untrimmed), and a mixture of lognormals--for transforming option data into the pdf. Despite their methodological ifferences, the three approaches lead to a similar pdf distinct from the lognormal benchmark, and usually characterized by skewness and leptokurtosis. We then document a striking positive correlation between skewness in these pdfs and the spot rate. The stronger a currency the more expectations are skewed towards a further appreciation of that currency. We interpret this finding as a rejection that these exchange rates evolve as a martingale, or that they follow a credible target zone, explicit or implicit. Instead, this this positive correlation is consistent with target zones with endogenous realignment risk. We discuss two interpretations of our results on skewness: when a currency is stronger, the actual probability of further large appreciation is higher, or because of risk, such states are valued more highly.

Handbook of Economic Forecasting

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Publisher : Elsevier
ISBN 13 : 0444627413
Total Pages : 1386 pages
Book Rating : 4.4/5 (446 download)

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Book Synopsis Handbook of Economic Forecasting by : Graham Elliott

Download or read book Handbook of Economic Forecasting written by Graham Elliott and published by Elsevier. This book was released on 2013-10-24 with total page 1386 pages. Available in PDF, EPUB and Kindle. Book excerpt: The highly prized ability to make financial plans with some certainty about the future comes from the core fields of economics. In recent years the availability of more data, analytical tools of greater precision, and ex post studies of business decisions have increased demand for information about economic forecasting. Volumes 2A and 2B, which follows Nobel laureate Clive Granger's Volume 1 (2006), concentrate on two major subjects. Volume 2A covers innovations in methodologies, specifically macroforecasting and forecasting financial variables. Volume 2B investigates commercial applications, with sections on forecasters' objectives and methodologies. Experts provide surveys of a large range of literature scattered across applied and theoretical statistics journals as well as econometrics and empirical economics journals. The Handbook of Economic Forecasting Volumes 2A and 2B provide a unique compilation of chapters giving a coherent overview of forecasting theory and applications in one place and with up-to-date accounts of all major conceptual issues. Focuses on innovation in economic forecasting via industry applications Presents coherent summaries of subjects in economic forecasting that stretch from methodologies to applications Makes details about economic forecasting accessible to scholars in fields outside economics

Entropic Least-Squares Valuation of American Options Subject to Moment Constraints

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ISBN 13 :
Total Pages : 62 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Entropic Least-Squares Valuation of American Options Subject to Moment Constraints by : Xisheng Yu

Download or read book Entropic Least-Squares Valuation of American Options Subject to Moment Constraints written by Xisheng Yu and published by . This book was released on 2020 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new nonparametric method for valuing American options. We extract the risk neutral moments using a set of option data and incorporate them into the entropy framework as constraints to recover the risk-neutral pricing measure. With the recovered risk-neutral measure, we generate paths of the underlying asset returns and determine the optimal exercising strategies via the least-squares algorithm of Longstaff and Schwartz (2001).The results, based on simulations and the IBM option contracts, demonstrate that our method consistently outperforms several alternative methods. Implementation of our method is simple and straightforward.

Handbook of Quantitative Finance and Risk Management

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Publisher : Springer Science & Business Media
ISBN 13 : 0387771174
Total Pages : 1700 pages
Book Rating : 4.3/5 (877 download)

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Book Synopsis Handbook of Quantitative Finance and Risk Management by : Cheng-Few Lee

Download or read book Handbook of Quantitative Finance and Risk Management written by Cheng-Few Lee and published by Springer Science & Business Media. This book was released on 2010-06-14 with total page 1700 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantitative finance is a combination of economics, accounting, statistics, econometrics, mathematics, stochastic process, and computer science and technology. Increasingly, the tools of financial analysis are being applied to assess, monitor, and mitigate risk, especially in the context of globalization, market volatility, and economic crisis. This two-volume handbook, comprised of over 100 chapters, is the most comprehensive resource in the field to date, integrating the most current theory, methodology, policy, and practical applications. Showcasing contributions from an international array of experts, the Handbook of Quantitative Finance and Risk Management is unparalleled in the breadth and depth of its coverage. Volume 1 presents an overview of quantitative finance and risk management research, covering the essential theories, policies, and empirical methodologies used in the field. Chapters provide in-depth discussion of portfolio theory and investment analysis. Volume 2 covers options and option pricing theory and risk management. Volume 3 presents a wide variety of models and analytical tools. Throughout, the handbook offers illustrative case examples, worked equations, and extensive references; additional features include chapter abstracts, keywords, and author and subject indices. From "arbitrage" to "yield spreads," the Handbook of Quantitative Finance and Risk Management will serve as an essential resource for academics, educators, students, policymakers, and practitioners.

Measuring Systemic Risk-Adjusted Liquidity (SRL)

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Publisher : International Monetary Fund
ISBN 13 : 1475505590
Total Pages : 70 pages
Book Rating : 4.4/5 (755 download)

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Book Synopsis Measuring Systemic Risk-Adjusted Liquidity (SRL) by : Andreas Jobst

Download or read book Measuring Systemic Risk-Adjusted Liquidity (SRL) written by Andreas Jobst and published by International Monetary Fund. This book was released on 2012-08-01 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

An Analytic Approximation of the Implied Risk-neutral Density of American Multi-asset Options

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ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (931 download)

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Book Synopsis An Analytic Approximation of the Implied Risk-neutral Density of American Multi-asset Options by : Juan Carlos Arismendi Zambrano

Download or read book An Analytic Approximation of the Implied Risk-neutral Density of American Multi-asset Options written by Juan Carlos Arismendi Zambrano and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: