COMPUTING BOUNDS ON RISK-NEUTRAL DISTRIBUTIONS FROM THE OBSERVED PRICES OF CALL OPTIONS

Michi Nishihara (), Mutsunori Yagiura () and Toshihide Ibaraki ()
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Michi Nishihara: Graduate School of Economics, Osaka University, Osaka 560-0043, Japan
Mutsunori Yagiura: Graduate School of Information Science, Nagoya University, Nagoya 464-8603, Japan
Toshihide Ibaraki: Kyoto College of Graduate Studies for Informatics, Kyoto 606-8225, Japan

Asia-Pacific Journal of Operational Research (APJOR), 2010, vol. 27, issue 02, 211-225

Abstract: This paper derives, in closed forms, upper and lower bounds on risk-neutral cumulative distribution functions of the underlying asset price from the observed prices of European call options, based only on the no-arbitrage assumption. The computed bounds from the option price data show that the gap between the upper and lower bounds is large near the underlying asset price but gets smaller away from the underlying asset price. Since the bounds can be easily computed and visualized, they could be practically used by investors in various ways.

Keywords: Option-implied risk-neutral distribution; linear semi-infinite programming; static hedging (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0217595910002648

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