Dynamics of Implied Distributions: Evidence from the CAC 40 Options Market

Lamya Kermiche

Finance, 2009, vol. 30, issue 2, 63-103

Abstract: This paper discusses the dynamics of the entire risk-neutral density, based on a Principal Component Analysis (PCA) of distribution curves calculated using a moneyness metric. The PCA revealed a limited number of factors that influence these dynamics. This paper outlines the time series of these factors and shows that at least one of them, displaying a strong correlation with the distribution variance, contains jumps. These findings are consistent with recent research showing that a jump component exists in the shock factors affecting implied volatility surfaces. Finally, this paper gives an example of how these findings can be applied to options portfolio hedging.

Date: 2009
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