IDEAS home Printed from https://ideas.repec.org/a/ime/imemes/v19y2001i3p143-170.html
   My bibliography  Save this article

Information Content of Implied Probability Distributions: Empirical Studies of Japanese Stock Price Index Options

Author

Listed:
  • Shiratsuka, Shigenori

    (Institute for Monetary & Econ Studies, Bank of Japan)

Abstract

Empirical studies of the information content of option prices have focused on exploring whether implied volatility contains useful information regarding the future fluctuation of underlying asset prices. If expectation formation in the option markets reflects all the currently available information regarding future price movements, option prices will be useful in forecasting the price fluctuation of underlying assets. This paper extends such an analytical framework to implied probability distribution as a whole and examines its information content by using Japanese stock price index option data (on a daily basis) from mid-1989 to mid-1996. To this end, the following questions are examined: (1) whether the implied probability distribution is a good forecast of the subsequently realized distribution of stock price fluctuations, and (2) whether a leads and lags relationship exists between stock price changes and changes in the shape of the implied probability distribution. The estimation results show that (1) the implied probability distribution contains some information regarding future price movements, but its forecasting ability is not superior to that of the historical distribution, and (2) the shape of the implied probability distribution not only responds to stock price changes but also contains some information on forecasting stock price changes. However, it should be noted that such results are highly sensitive to the choice of sample period, suggesting that the information content depends on macroeconomic and financial market conditions. Therefore, the information contained in an implied probability distribution is difficult to interpret automatically as an information variable for monetary policy, and further studies are needed on how to make use of information contained in implied probability distributions.

Suggested Citation

  • Shiratsuka, Shigenori, 2001. "Information Content of Implied Probability Distributions: Empirical Studies of Japanese Stock Price Index Options," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(3), pages 143-170, November.
  • Handle: RePEc:ime:imemes:v:19:y:2001:i:3:p:143-170
    as

    Download full text from publisher

    File URL: http://www.imes.boj.or.jp/research/papers/english/me19-3-5.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:eneeco:v:64:y:2017:i:c:p:440-457 is not listed on IDEAS
    2. Robert R Bliss & Nikolaos Panigirtzoglou, 2000. "Testing the stability of implied probability density functions," Bank of England working papers 114, Bank of England.
    3. Wilkens, Sascha & Roder, Klaus, 2006. "The informational content of option-implied distributions: Evidence from the Eurex index and interest rate futures options market," Global Finance Journal, Elsevier, vol. 17(1), pages 50-74, September.
    4. Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 381-422, March.
    5. Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:19:y:2001:i:3:p:143-170. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken). General contact details of provider: http://edirc.repec.org/data/imegvjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.