Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71211
Authors: 
Dupont, Dominique Y.
Year of Publication: 
2001
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 104
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.
Subjects: 
implied risk-neutral probability distribution
implied-tree method
JEL: 
G13
G14
Document Type: 
Working Paper

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