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Option Implied Probability Density Functions: Methodology and Use in Understanding Investor Sentiment

Author

Listed:
  • O'Donnell, Seamus

    (Central Bank of Ireland)

  • O'Keeffe, Mary

    (Central Bank of Ireland)

Abstract

In recent years there has been lots of research into the extraction of information from the options market. This signed article presents a modelling approach which depicts estimates of future movements of an asset price, as priced by investors. They are of benefit as they incorporate information from the full distribution of investor beliefs. The purpose of this article is to demonstrate the benefits of such models and provide guidance on how they may be constructed and interpreted.

Suggested Citation

  • O'Donnell, Seamus & O'Keeffe, Mary, 2016. "Option Implied Probability Density Functions: Methodology and Use in Understanding Investor Sentiment," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-94, October.
    • Handle: RePEc:cbi:qtbart:y:2016:m:10:p:85-94
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    File URL: https://centralbank.ie/docs/default-source/publications/quarterly-bulletins/qb-archive/2016/QB4-16/quarterly-bulletin-no-4-2016.pdf?sfvrsn=#page=87
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    References listed on IDEAS

    as
    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    2. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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