Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120801
Authors: 
Malz, Allan M.
Year of Publication: 
2014
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 677
Abstract: 
This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other impla usible results. I give examples for equities, foreign exchange, and long-term interest rates.
Subjects: 
option pricing
risk-neutral distributions
JEL: 
G01
G13
G17
G18
Document Type: 
Working Paper

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