Market Expectations And Option Prices
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| Author | : Martin Mandler |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 227 |
| Release | : 2012-12-06 |
| Genre | : Business & Economics |
| ISBN | : 3642574289 |
This book is a slightly revised version of my doctoral dissertation which has been accepted by the Department of Economics and Business Administration of the Justus-Liebig-Universitat Giessen in July 2002. I am indebted to my advisor Prof. Dr. Volbert Alexander for encouraging and supporting my research. I am also grateful to the second member of the doctoral committee, Prof. Dr. Horst Rinne. Special thanks go to Dr. Ralf Ahrens for providing part of the data and to my colleague Carsten Lang, who spent much time reading the complete first draft. Wetzlar, January 2003 Martin Mandler Contents 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Part I Theoretical Foundations 2 Arbitrage Pricing and Risk-Neutral Probabilities........ .. 7 2.1 Arbitrage Pricing in the Black/Scholes-Merton Model... . . .. . 7 2.2 The Equivalent Martingale Measure and Risk-Neutral Valuation ............................................... 11 2.3 Extracting Risk-Neutral Probabilities from Option Prices. . . .. 13 2.4 Summary............................................... 15 Appendix 2A: The Valuation Function in the Black/Scholes-Merton Model .................................................. 16 Appendix 2B: Some Further Details on the Replication Strategy ... 21 3 Survey of the Related Literature .......................... 23 3.1 The Information Content of Forward and Futures Prices. . . .. . 24 3.2 The Information Content of Implied Volatilities ............. 25 3.2.1 Implied Volatilities and the Risk-Neutral Probability Density .......................................... 27 3.2.2 The Term Structure of Implied Volatilities. . . . . . . .. . . 29 . 3.2.3 The Forecasting Information in Implied Volatilities. . .. 30 3.2.4 Implied Correlations as Forecasts of Future Correlations 43 VIII Contents 3.3 The Skewness Premium ..... . . . . . . . . . . . . . . . . . . .. . . 45 . . . . . . .
| Author | : Áron Gereben |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 2002 |
| Genre | : Foreign exchange rates |
| ISBN | : |
| Author | : Bank of Canada |
| Publisher | : |
| Total Pages | : 23 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
| Author | : Alejandro García |
| Publisher | : |
| Total Pages | : |
| Release | : 2010 |
| Genre | : Foreign exchange rates |
| ISBN | : |
Security prices contain valuable information that can be used to make a wide variety of economic decisions. To extract this information, a model is required that relates market prices to the desired information, and that ideally can be implemented using timely and low-cost methods. The authors explore two models applied to option prices to extract the risk-neutral probability density function (R-PDF) of the expected Can$/US$ exchange rate. Each of the two models extends the Black-Scholes model by using a mixture of two lognormals for the terminal distribution, instead of a single lognormal: one mixed lognormal imposes a specific stochastic process for the underlying asset, and the other does not. The contribution of the paper is to propose a simple methodology to build R-PDFs with a constant time to maturity in the absence of option prices for the maturity of interest. The authors apply this methodology and find that the two models provide similar results for the degree of uncertainty (i.e., the variance) surrounding the future level of the exchange rate, but differ on the likely direction of the exchange rate movements (i.e., the skewness).
| Author | : Carlos Alberto Palomino Lazo |
| Publisher | : LAP Lambert Academic Publishing |
| Total Pages | : 96 |
| Release | : 2011-09-30 |
| Genre | : |
| ISBN | : 9783845422343 |
This book estimates risk neutral parameters of a jump diffusion model, as in Bates (1991), implicit in the option prices on the S&P500 futures over the period 2006-2008. Additionally, it investigates the extent to which market participants anticipated the financial market crash of 2008. We find that high levels of skewness premium are detectable in the short maturity out-of-the-money put options as early as July 2007. Nevertheless, market expectations of an extreme downturn subsided after the collapse of Bear Stearns in April 2008. Overall, our findings indicate that the estimated parameters show the presence of crash expectations prior to September 2008 but there is no evidence that the magnitude of the crash was predictable.
| Author | : John C. Cox |
| Publisher | : Prentice Hall |
| Total Pages | : 518 |
| Release | : 1985 |
| Genre | : Business & Economics |
| ISBN | : |
Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
| Author | : Mr.Noureddine Krichene |
| Publisher | : INTERNATIONAL MONETARY FUND |
| Total Pages | : 0 |
| Release | : 2004-10-01 |
| Genre | : Business & Economics |
| ISBN | : 9781451859997 |
Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
| Author | : Aidan Allen |
| Publisher | : |
| Total Pages | : 39 |
| Release | : 2000 |
| Genre | : Options (Finance) |
| ISBN | : 9781863429955 |
| Author | : Jeffrey Owen Katz |
| Publisher | : McGraw Hill Professional |
| Total Pages | : 449 |
| Release | : 2005-03-21 |
| Genre | : Business & Economics |
| ISBN | : 0071454705 |
Advanced Option Pricing Models details specific conditions under which current option pricing models fail to provide accurate price estimates and then shows option traders how to construct improved models for better pricing in a wider range of market conditions. Model-building steps cover options pricing under conditional or marginal distributions, using polynomial approximations and “curve fitting,” and compensating for mean reversion. The authors also develop effective prototype models that can be put to immediate use, with real-time examples of the models in action.
| Author | : Ping Zhou |
| Publisher | : FT Press |
| Total Pages | : 258 |
| Release | : 2012-10-15 |
| Genre | : Business & Economics |
| ISBN | : 0132947404 |
By trading on corporate earnings, investors can reliably profit in both up and down markets, while avoiding market risk for nearly the entire quarter. In this book, two leading traders and portfolio managers present specific, actionable techniques anyone can use to capture these sizable profits. Ping Zhou and John Shon have performed an unprecedented empirical analysis of thousands of stocks, reviewing tens of millions of data points associated with option prices, earnings announcement returns, and fundamentals. Their massive analysis has identified consistent opportunities associated with focusing on the magnitude of the market’s reaction to earnings, not its direction. Option Trading Set-Ups for Corporate Earnings News offers concrete guidance for improving the likelihood of making correct forecasts, and managing the risks of incorrect forecasts. It introduces several ways to exploit option trading opportunities around earnings news, discuss crucial issues that most retail investors haven’t considered, and explore aspects of earnings-related option trading that have never been empirically examined and documented before. For example, they identify hidden patterns and potential opportunities based on valuation, industry, volatility, analyst forecasts, seasonality, and trades that immediately follow earnings announcements. Simply put, trading on earnings reports offers immense profit opportunities, if you know how. This book provides incontrovertible facts and detailed strategies, not just theories and anecdotes!
