Using options prices to infer PDF'S for asset prices: an application to oil prices during the Gulf crisis

Will Melick () and Charles P. Thomas

No 541, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a general method to infer martingale equivalent probability density functions (PDFs) for asset prices using American options prices. The early exercise feature of American options precludes expressing the option price in terms of the PDF of the price of the underlying asset. We derive tight bounds for the option price in terms of the PDF and demonstrate how these bounds, together with observed option prices, can be used to estimate the parameters of the PDF. We infer the distribution for the price of crude oil during the Persian Gulf crisis and find the distribution differs significantly from that recovered using standard techniques.

Keywords: Power resources - Prices; Options (Finance); Persian Gulf War, 1991 (search for similar items in EconPapers)
Date: 1996
View list of references View citations in EconPapers

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/1996/541/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/1996/541/ifdp541.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedgif:541

Ordering information: This working paper can be ordered from
http://www.federalreserve.gov/pubs/ifdp/order.htm

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().