Risk-Neutral Densities: A Review

Stephen Figlewski ()
Additional contact information
Stephen Figlewski: New York University Stern School of Business, New York, NY 10012-1126, USA

Annual Review of Financial Economics, 2018, vol. 10, issue 1, 329-359

Abstract: Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk-neutral density (RND) over the underlying price at expiration. The RND contains investors’ beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With a particular focus on US equity options, I review the historical development of this powerful concept, practical details of fitting an RND to options market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I briefly discuss areas of active current research including the pricing kernel puzzle and the volatility surface, and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.

Keywords: risk-neutral densities; option risk premia; implied volatility; option pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G17 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://doi.org/10.1146/annurev-financial-110217-022944 (application/pdf)
Full text downloads are only available to subscribers. Visit the abstract page for more information.

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: https://EconPapers.repec.org/RePEc:anr:refeco:v:10:y:2018:p:329-359

Ordering information: This journal article can be ordered from
http://www.annualreviews.org/action/ecommerce

Access Statistics for this article

More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().