Extracting risk-neutral probability distributions from option prices using trading volume as a filter

Arbeitspapier

This paper introduces a new technique to infer the risk-neutral probability distribution of an asset from the prices of options on this asset. The technique is based on using the trading volume of each option as a proxy of the informativeness of the option. Not requiring the implied probability distribution to recover exactly the market prices of the options allows us to weight each option by a function of its trading volume. As a result, we obtain implied probability distributions that are both smoother and should be more reflective of fundamentals.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Reihe Ökonomie / Economics Series ; No. 104

Classification and Topics

• Classification: Wirtschaft ; Contingent Pricing; Futures Pricing; option pricing ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: implied risk-neutral probability distribution ; implied-tree method ; Optionspreistheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dupont, Dominique Y.
• Event: Veröffentlichung
• (who): Institute for Advanced Studies (IHS)
• (where): Vienna
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/71211
• Last update: 10.03.2025, 11:41 AM CET