Implied Probability Distribution in Financial Options
The objective of this work is to learn about the information contained in local market financial options regarding the peso-dollar parity. The goal is to test whether this is a relevant source that should be considered by the financial agents when forming expectations regarding the future path of underlying assets. The main methodologies for estimating the probability distribution function derived from option prices are reviewed. The present article relies on the methodology developed by Malz (1997) which, in contrast with others, makes no assumptions on the underlying asset and requires very few market quotes. The main results of this research are twofold. First, the implicit volatility in options does not perform better than alternative methods, and a significant bias and inefficiency component is found. Second, the interval forecasts derived from the probability distributions show that only the three-month-ahead forecast seems to be optimal in the sense of lack of both forecasting error lag dependence and dependence on volatility, while one- and six-month-ahead forecasts do exhibit these dependencies.
|Date of creation:||Oct 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert C. Merton, 1973.
"Theory of Rational Option Pricing,"
Bell Journal of Economics,
The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Jondeau, Eric & Rockinger, Michael, 2000.
"Reading the smile: the message conveyed by methods which infer risk neutral densities,"
Journal of International Money and Finance,
Elsevier, vol. 19(6), pages 885-915, December.
- Michael Rockinger & Eric Jondeau, 1997. "Reading the Smile: The Message Conveyed by Methods which Infer Risk Neutral Densities," Working Papers hal-00601591, HAL.
- Jondeau, Eric & Rockinger, Michael, 1998. "Reading the Smile: The Message Conveyed by Methods which Infer Risk Neutral Densities," CEPR Discussion Papers 2009, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:596. 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: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.