Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review
In this selective literature review, we start by observing that in efficient markets, there is information incorporated in option prices that might help us to design option pricing models. To this end, we review the numerous methods of recovering risk-neutral probability distributions from option prices at one particular time to expiration and their applications. Next, we move beyond one time to expiration to the construction of implied binomial trees, which model the stochastic process of the underlying asset. Finally, we describe extensions of implied binomial trees, and other non-parametric methods.
|Date of creation:||1999|
|Date of revision:|
|Publication status:||Published in Journal of Derivatives 2.7(1999): pp. 66-82|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
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- Brenner, Menachem & Eom, Young Ho & Landskroner, Yoram, 1996. "Implied foreign exchange rates using options prices," International Review of Financial Analysis, Elsevier, vol. 5(3), pages 171-183.
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- Campa, Jose M. & Chang, P. H. Kevin & Reider, Robert L., 1998. "Implied exchange rate distributions: evidence from OTC option markets1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 117-160, February.
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