liabilities. Journal of Political Economy 81, 637–659] and Merton [Merton, R. (1973). Theory of rational option pricing. Bell … Journal of Economics and Management Science 4, 141–184] option pricing theory is that there exists a self-financing dynamic … renders the risk-neutral probability measure non unique and allows us to determine the option price only within a range …

progress. The research concerns the recovery of market-wide risk-neutral probabilities and risk aversion from option prices … independently estimate risk-neutral probabilities, taking advantage of the now highly liquid index option market. We show that, if … provide an empirical test of implied trees against alternative option pricing models (including “naïve trader” approaches) by …