Estimating Implied Pdfs from American Options on Futures: A New Semi-Parametric Approach
Posted: 30 Jul 2004 Last revised: 24 Mar 2008
Abstract
This article develops a new methodology for estimating the risk neutral density implied by American type futures options. The methodology employed uses an Edgeworth series expansion parameterization for the probability distribution of asset returns. Data from the crude oil market are used to test a number of hypotheses. It is found that the market consensus can be accurately reflected in the recovered densities. The risk neutral densities are also found to differ significantly from a single lognormal distribution. In addition, they prove to be more robust than risk neutral densities recovered with a model, which assumes a mixture of two lognormal distributions.
Note: This is a description of the paper and not the actual abstract.
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation