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Summary statistics of option-implied probability density functions and their properties

Author

Listed:
  • Lynch, Damien

    (Bank of England)

  • Panigirtzoglou, Nikolaos

    (Department of Economics, Queen Mary, University of London)

Abstract

The statistics that summarise probability density functions(pdfs) implied from option prices can be used to assess market expectations about future uncertainty, asymmetry and the probability of extreme movements in asset prices. A time-series analysis of these statistics for equity index and interest rate markets provides some stylised facts about the behaviour of these elements of market expectations, their historical distribution, similarity and relative stability. Relationships between them and movements in underlying asset prices are considered. Cross-asset and cross-country comparisons and the information content of the implied pdfs for future macroeconomic and financial variables are also assessed.

Suggested Citation

  • Lynch, Damien & Panigirtzoglou, Nikolaos, 2008. "Summary statistics of option-implied probability density functions and their properties," Bank of England working papers 345, Bank of England.
    • Handle: RePEc:boe:boeewp:0345
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    References listed on IDEAS

    as
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    Cited by:

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    3. Abderrahmen Aloulou & Siwar Ellouze, 2017. "Does fundamental value run asset price formation process? Evidence from option price information content," Journal of Asset Management, Palgrave Macmillan, vol. 18(4), pages 255-268, July.
    4. Hansen, Stephen & McMahon, Michael, 2011. "How Experts Decide : Identifying Preferences versus Signals from Policy Decisions," The Warwick Economics Research Paper Series (TWERPS) 963, University of Warwick, Department of Economics.
    5. Nessim Souissi, 2017. "The Implied Risk Neutral Density Dynamics: Evidence from the S&P TSX 60 Index," Journal of Applied Mathematics, Hindawi, vol. 2017, pages 1-10, June.
    6. Carol Alexander & Alexander Rubinov & Markus Kalepky & Stamatis Leontsinis, 2012. "Regime‐dependent smile‐adjusted delta hedging," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(3), pages 203-229, March.
    7. Healy, J.V. & Gregoriou, A. & Hudson, R., 2018. "Test of recent advances in extracting information from option prices," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 292-302.
    8. Lim, Kian Guan & Chen, Ying & Yap, Nelson K.L., 2019. "Intraday information from S&P 500 Index futures options," Journal of Financial Markets, Elsevier, vol. 42(C), pages 29-55.
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    11. 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.

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    More about this item

    Keywords

    Options; implied probability density functions (pdfs); summary statistics; implied volatility; implied asymmetry; market expectations.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G19 - Financial Economics - - General Financial Markets - - - Other

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