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Recovering Probability Distributions From Option Prices
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Book Synopsis Recovering Probability Distributions from Option Prices by : Mark Rubinstein
Download or read book Recovering Probability Distributions from Option Prices written by Mark Rubinstein and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives underlying asset risk-neutral probability distributions of European options on the Samp;P 500 index. Nonparametric methods are used to choose probabilities which minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices. Alternative optimization specifications produce approximately the same implied distributions. A new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed. Since the crash, the risk-neutral probability of a three (four) standard deviation decline in the index (about-36% (-46%) over a year) is about 10 (100) times more likely than under the assumption of lognormality.
Book Synopsis Using Illiquid Option Prices to Recover Probability Distributions by : Fernando Gonzáles Miranda
Download or read book Using Illiquid Option Prices to Recover Probability Distributions written by Fernando Gonzáles Miranda and published by . This book was released on 1998 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Recovering Probabilities and Risk Aversion from Option Prices and Realized Returns by : Mark Rubinstein
Download or read book Recovering Probabilities and Risk Aversion from Option Prices and Realized Returns written by Mark Rubinstein and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Recovering Probabilistic Information from Options Prices and the Underlying by : Bruce Mizrach
Download or read book Recovering Probabilistic Information from Options Prices and the Underlying written by Bruce Mizrach and published by . This book was released on 2008 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying. The paper first explores non-parametric procedures for reconstructing densities directly from options market data. I then consider local volatility functions, both through implied volatility trees and volatility interpolation. I then turn to alternative specifications of the stochastic process for the underlying. I estimate a mixture of log normals model, apply it to exchange rate data, and illustrate how to conduct forecast comparisons. I finally turn to the estimation of jump risk by extracting bipower variation.
Book Synopsis Beyond Implied Volatility by : David C. Shimko
Download or read book Beyond Implied Volatility written by David C. Shimko and published by . This book was released on 1991 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Extracting Risk-neutral Probability Distributions from Option Prices Using Trading Volume as a Filter by : Dominique Y. Dupont
Download or read book Extracting Risk-neutral Probability Distributions from Option Prices Using Trading Volume as a Filter written by Dominique Y. Dupont and published by . This book was released on 2001 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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:
Book Synopsis Recovering Risk Aversion from Option Prices and Realized Returns by : Jens Carsten Jackwerth
Download or read book Recovering Risk Aversion from Option Prices and Realized Returns written by Jens Carsten Jackwerth and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by option prices and realized returns on the Samp;P500 index simultaneously. These risk aversion functions dramatically change shapes around the 1987 crash: Precrash, they are positive and decreasing in wealth and largely consistent with standard assumptions made in economic theory. Postcrash, they are partially negative and partially increasing and irreconcilable with those assumptions. Mispricing in the option market is the most likely cause. Simulated trading strategies exploiting this mispricing shows excess returns even after accounting for the possibility of further crashes, transaction costs, and hedges against the downside risk.
Book Synopsis Recovering Risk Neutral Densities from Option Prices by : Leonidas Rompolis
Download or read book Recovering Risk Neutral Densities from Option Prices written by Leonidas Rompolis and published by . This book was released on 2017 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we present a new method of approximating the risk neutral density (RND) from option prices based on the C-type Gram-Charlier series expansion (GCSE) of a probability density function. The exponential form of this type of GCSE guarantees that it will always give positive values of the risk neutral probabilities and it can allow for stronger deviations from normality, which are two drawbacks of the A-type GCSE used in practice. To evaluate the performance of the suggested expansion of the RND, the paper presents simulation and empirical evidence.
Book Synopsis Probability Distributions of Assets Inferred from Option Prices Via the Principle of Maximum Entropy by : Jonathan Borwein
Download or read book Probability Distributions of Assets Inferred from Option Prices Via the Principle of Maximum Entropy written by Jonathan Borwein and published by . This book was released on 2002 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Option-Implied Probability Distributions and Currency Excess Returns by : Allan M. Malz
Download or read book Option-Implied Probability Distributions and Currency Excess Returns written by Allan M. Malz and published by . This book was released on 2006 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets interbank option pricing conventions make possible reliable inferences about risk-neutral probability distributions with relatively little data. Moments drawn from risk-neutral exchange rate distribution are used to explore several issues related to the puzzle of excess returns in currency markets. Tests of the international capital asset pricing model using risk-neutral moments as explanatory variables indicate that option-based moments have considerably greater explanatory power for excess returns in currency markets than has been found in earlier work. Tests of several hypotheses generated by the peso problem approach indicate that jump risk measured by the risk-neutral coefficient of skewness can explain only a small part of the forward bias. These tests take into account not only the second, but the third and fourth moments of the exchange rate implied by option prices, and avoid testing a joint hypothesis including a distributional assumption.
Book Synopsis Estimating Probability Distributions Implicit in Option Prices by : Michael A. Ball
Download or read book Estimating Probability Distributions Implicit in Option Prices written by Michael A. Ball and published by . This book was released on 2001 with total page 83 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Option Implied Risk-Neutral Distributions and Implied Binomial Trees by : Jens Carsten Jackwerth
Download or read book Option Implied Risk-Neutral Distributions and Implied Binomial Trees written by Jens Carsten Jackwerth and published by . This book was released on 2008 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this partial and selective literature review of option implied risk-neutral distributions and of implied binomial trees, we start by observing that in efficient markets, there is information contained in option prices, which might help us to design option pricing models. To this end, we review the numerous methods of recovering risk-neutral probability distributions from option prices at one particular time-to-expiration and their applications. Next, we extend our attention beyond one time-to-expiration to the construction of implied binomial trees, which model the stochastic process of the underlying asset. Finally, we describe extensions of implied binomial trees, which incorporate stochastic volatility, as well as other non-parametric methods.
Book Synopsis Recovering the Probability Density Function of Asset Prices Using GARCH as Diffusion Approximations by : Fabio Fornari
Download or read book Recovering the Probability Density Function of Asset Prices Using GARCH as Diffusion Approximations written by Fabio Fornari and published by . This book was released on 2001 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Recovering an Asset's Implied Pdf from Option Prices by : William R. Melick
Download or read book Recovering an Asset's Implied Pdf from Option Prices written by William R. Melick and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a general method for estimating the implied, martingale equivalent, probability density function (PDF) for futures prices from American options prices. The early exercise feature of American options precludes expressing the price of the option in terms of the PDF. There exist tight bounds for the price of American options in terms of the PDF. We demonstrate how these bounds, together with observed option prices, can be used to estimate the parameters of the PDF. We estimate the distribution for crude oil during the Persian Gulf crisis and find the distribution differs significantly from that recovered using standard techniques.
Book Synopsis Implementing the Principle of Maximum Entropy in Option Pricing by : Weiyu Guo
Download or read book Implementing the Principle of Maximum Entropy in Option Pricing written by Weiyu Guo and published by . This book was released on 1999 with total page 258 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Black-Scholes option pricing model has been the foundation of option pricing analysis. Yet as well known as the model itself, its empirical deficiencies are also well documented. Option prices generated by the Black-Scholes formula are often found to systematically differ from observed prices. The patterns of mispricing are generally believed to result from violations of one or more assumptions underlying the Black-Scholes option pricing model, such as the natural logarithm of the underlying stock price following a normal distribution with a variance that increases exactly linearly with time. This dissertation concerns an evaluation of the Principle of Maximum Entropy as a method for recovering a probability density function from stock index option prices. Theoretically, the resulting probability density is "the least prejudiced estimate since it is maximally noncommittal with respect to missing or unknown information." Empirically, this dissertation demonstrates that entropy valuation gives much stronger performance than does the Black-Scholes model in pricing stock index options on the S & P 500 and on the Dow Jones Industrial Average.
Book Synopsis Using Option Prices to Estimate Realignment Probabilities in the European Monetary System by : Allan M. Malz
Download or read book Using Option Prices to Estimate Realignment Probabilities in the European Monetary System written by Allan M. Malz and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper presents a method of computing the risk neutral probability distribution of future exchange rates from the prices of currency options. The method is applied to estimate the risk neutral ex ante probability of a realignment of the pound sterling against the mark in 1992. The computation fits a jump-diffusion model of exchange rate behavior to market option price data, including at-the-money options as well as risk reversals and strangles, to retrieve the unobserved parameters of the jump-diffusion process.
