Extracting Risk-neutral Probability Distributions from Option Prices Using Trading Volume as a Filter PDF Download
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Author: Dominique Y. Dupont
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 32
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Author: Dominique Y. Dupont
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 32
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Author: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Warren Deats
Publisher:
ISBN:
Category :
Languages : en
Pages : 210
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Author: Allan M. Malz
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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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.
Author: James Huang
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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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.
Author: Yisong S. Tian
Publisher:
ISBN:
Category :
Languages : en
Pages :
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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).
Author: Jessica List
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This thesis empirically analyses implied risk neutral probability distributions of SMI index options. The contribution of this thesis is its data base (SMI index options), the long observation period (1999 - 2008) and its attempt to use the framework of option implied risk neutral probability distributions in the context of trading strategies. The influence of important market variables (such as the risk premium and the term structure of Swiss interest rates) on the estimated RNDs summary statistics is analysed in a regression framework accounting for heteroscedasticity and autocorrelation of the variables under consideration. It turns out that most of the analysed domestic market variables do not have a significant influence on the calculated implied RND's summary statistics and no significant international spillovers are observable. In addition, option implied moments, in particular the volatility of the implied RND, seem to be poor predictors for future moments of the SMI return distribution. Trading strategies based on option implied information are implemented. After accounting for transaction costs, some of these strategies are not only able to outperform a direct investment in the underlying, but systematically outperformed comparable trading strategies based on spot prices.
Author: Javaid R. Khwaja
Publisher: iUniverse
ISBN: 1475997388
Category : Business & Economics
Languages : en
Pages : 595
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The new economy, under the impetus of the ever-widening outreach of the Internet, is undergoing a transition. In the meantime, there's also been a shift to the information paradigm, with its emphasis on lack of foresight. These processes have almost completely supplanted the concept of market that was once one of the most cardinal features of conventional economic theory. In Toward a General Theory of Exchange: Strategic Decisions and Complexity, author Dr. Javaid R. Khwaja traces the slow melting of the market, the most ubiquitous contraption and the summum bonum of economic science, as an organized manifestation of complexity, with its wide-ranging impact on the flow of funds. Using the historical background of economic theories, this study blends the interdisciplinary range and fills the vacuum that has existed among current conventional economic theory, the theory of strategic decision making, actor-network theory, the domain of law and economics, and the science of complexity. An observer of economic development for several decades, Khwaja shows the relationship between technology and economics and how it affects social exchanges and trends.
Author: Graham Elliott
Publisher: Elsevier
ISBN: 0444627413
Category : Business & Economics
Languages : en
Pages : 1386
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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
Author: Gerda Falkner
Publisher:
ISBN:
Category : European Union
Languages : en
Pages : 62
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