Simple and reliable way to compute option-based risk-neutral distributions

This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other implausible results. I give examples for equities, foreign exchange, and long-term interest rates.

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Year of publication:	2014-06-01
Authors:	Malz, Allan M.
Institutions:	Federal Reserve Bank of New York
Subject:	option pricing \| risk-neutral distributions

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Extent:	application/pdf
Series:	Staff Reports.
Type of publication:	Book / Working Paper
Notes:	The text is part of a series Staff Reports Number 677 42 pages
Classification:	G01 - Financial Crises ; G13 - Contingent Pricing; Futures Pricing ; G17 - Financial Forecasting ; G18 - Government Policy and Regulation
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010823096