Revealing the implied risk-neutral MGF from options: The wavelet method

Revealing the Implied Risk-neutral MGF from Options: the Wavelet Method

Options are believed to contain unique information on the risk-neutral moment generating function (MGF) or the risk-neutral probability density function (PDF) of the underlying asset. This paper applies the wavelet method to approximate the implied risk-neutral MGF from option prices. Monte Carlo simulations are carried out to show how the risk-neutral MGF can be obtained using the wavelet meth...

Estimating the Implied Risk Neutral Density

The market's risk neutral probability distribution for the value of an asset on a future date can be extracted from the prices of a set of options that mature on that date, but two key technical problems arise. In order to obtain a full well-behaved density, the option market prices must be smoothed and interpolated, and some way must be found to complete the tails beyond the range spanned by t...

Determining and benchmarking risk neutral distributions implied from option prices

Implied and Local Correlations from Spread Options

The multivariate lognormal model is a basic pricing model for derivatives with multiple underlying processes, for example, spread options. However, the market observation of implied correlation skew examplifies how inaccurate the constant correlation assumption in the multivariate lognormal model can be. In this paper, we study alternative modeling approaches that generate implied correlation s...

Pricing Options Using Implied Trees: Evidence from Ftse-100 Options

of High Performance Computing are gratefully acknowledged. The authors also wish to thank the two referees for their insightful comments that helped to improve the this article in significant ways. MATLAB (a mathematical, financial, and statistical software language) was used for the programming throughout the study. *Correspondence author, School of Business, Singapore Management University, 4...