Estimating Realistic Implied Correlation Matrix from Option Prices

Estimating Implied Probabilities from Option Prices and the Underlying

This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying. The paper first explores nonparametric procedures for reconstructing densities directly from options market data. I then consider local volatility functions, both through implied volatility trees and volatility interpolation. I then turn to alternative specifications ...

Determining and benchmarking risk neutral distributions implied from option prices

Extracting implied correlation matrices from index option prices: a statistical approach

We propose a new approach to the model calibration problem, which takes into account the multiplicity of solutions. Starting from a prior distribution on model parameters and a set of observed option prices, we propose a probabilistic construction which yields an arbitrage free pricing rule consistent with these observed option prices. Our approach yields a simple Monte Carlo algorithm for simu...

Consumption and Portfolio Choice with Option-Implied State Prices

We propose an empirical implementation of the consumption-investment problem using the martingale representation alternative to dynamic programming. Our method is based on the direct observation of state prices from options data. This greatly simpli…es the investor’s task of specifying the investment opportunity set and inherits the computational convenience of the martingale representation. Ou...

Measuring Systematic Risk Using Implied Beta in Option Prices

This paper provides a novel method to estimate β thoroughly based on option prices. Through combining the market model and the multivariate risk-neutral valuation relationship in Stapleton and Subrahmanyam (1984) and Câmara (2003), we develop a pricing model for individual stock options involving the volatility of the market index level and the levels of the β and the idiosyncratic risk of the ...