Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/31297
Authors: 
Mizrach, Bruce
Year of Publication: 
2008
Series/Report no.: 
Working papers // Department of Economics, Rutgers, the State University of New Jersey 2007,02
Abstract: 
This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying. The paper first explores non-parametric 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 of the stochastic process for the underlying. I estimate a mixture of log normals model, apply it to exchange rate data, and illustrate how to conduct forecast comparisons. I finally turn to the estimation of jump risk by extracting bipower variation.
Subjects: 
Options
implied probability densities
volatility smile
jump risk
bipower variation
JEL: 
G12
G14
F31
Document Type: 
Working Paper

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