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Recovering subjective probability distributions

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  • Akira Yamazaki

Abstract

This study proposes a direct estimation method for recovering subjective probability distributions from option prices. We find that the subjective cumulative distribution function and subjective statistics are represented as static portfolios composed of plain vanilla options. The portfolio weights of the options are determined by the levels of the reciprocal of the pricing kernel and their differentiation. Using options data, we investigate the historical behavior of subjective probability distributions of returns on the S&P 500 index. We also analyze subjective equity risk premiums and subjective variance risk premiums, which can be regarded as ex ante risk premiums.

Suggested Citation

  • Akira Yamazaki, 2022. "Recovering subjective probability distributions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1234-1263, July.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:7:p:1234-1263
    DOI: 10.1002/fut.22328
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    References listed on IDEAS

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