Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review
Abstract
In this selective literature review, we start by observing that in efficient markets, there is information incorporated in option prices that 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 move 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, and other non-parametric methods.Download Info
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11634.Length:
Date of creation: 1999
Date of revision:
Publication status: Published in Journal of Derivatives 2.7(1999): pp. 66-82
Handle: RePEc:pra:mprapa:11634
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Related research
Keywords: Binomial Trees; Risk-Neutral;Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
References
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- Buchen, Peter W. & Kelly, Michael, 1996. "The Maximum Entropy Distribution of an Asset Inferred from Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 143-159, March.
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- Karim Abadir & Michael Rockinger, . "Density-Embedding Functions," Discussion Papers 97/16, Department of Economics, University of York.
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Papers
95-25, Columbia - Graduate School of Business.
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