IDEAS home Printed from https://ideas.repec.org/p/rut/rutres/199819.html
   My bibliography  Save this paper

Methods for Extracting the Implied Distributions in Option Prices

Author

Listed:
  • Bruce Mizrach

    (Rutgers University)

Abstract

This paper examines a variety of methods for extracting implied probability distributions from option prices. I critically analyze and extend approaches suggested by Derman and Kani (1994), Rubinstein (1994) and Shimko (1993). I develop a new simulated method of moments estimation procedure. I parameterize the underlying asset return process as a mixture of log-normal densities, price the options using Monte Carlo methods, and compare these simulated price ``moments'' to the market data. The mixture density is quite promising in explaining the volatility smile. I compare these estimators in two data exercises. One is a standard Black-Scholes model, and the other a model that display a volatility smile. I find that the simulated moments method proves to be the most robust.

Suggested Citation

  • Bruce Mizrach, 1998. "Methods for Extracting the Implied Distributions in Option Prices," Departmental Working Papers 199819, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:199819
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    implied distribution; option price; volatility smile;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

    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:rut:rutres:199819. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/derutus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.