Extracting Risk-Neutral Probability Distributions from Option Prices Using Trading Volume as a Filter

Dupont, Dominique Y. (September 2001) Extracting Risk-Neutral Probability Distributions from Option Prices Using Trading Volume as a Filter. IHS Economics Series 104

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Abstract or Table of Contents

Abstract: 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.;

Item Type: IHS Series
Keywords: 'Implied risk-neutral probability distribution' 'Implied-tree method'
Classification Codes (e.g. JEL): G13, G14
Status: Published
Date Deposited: 26 Sep 2014 10:37
Last Modified: 22 Jul 2017 17:49
URI: http://irihs.ihs.ac.at/id/eprint/1367

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