Recovering Probabilistic Information From Options Prices and the Underlying
AbstractThis 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.
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Bibliographic InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200702.
Length: 20 pages
Date of creation: 19 Jan 2007
Date of revision:
Publication status: forthcoming in Cheng-few Lee and Alice C. Lee (eds.), Handbook of Quantitative Finance
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options; implied probability densities; volatility smile; jump risk; bipower variation;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- F31 - International Economics - - International Finance - - - Foreign Exchange
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