Revealing the implied risk-neutral MGF from options: The wavelet method

Emmanuel Haven, Xiaoquan Liu, Chenghu Ma and Liya Shen

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 3, 692-709

Abstract: Options are believed to contain unique information on the risk-neutral moment generating function (MGF) or the risk-neutral probability density function (PDF) of the underlying asset. This paper applies the wavelet method to approximate the implied risk-neutral MGF from option prices. Monte Carlo simulations are carried out to show how the risk-neutral MGF can be obtained using the wavelet method. With the Black-Scholes model as the benchmark, we offer a novel method to reveal the implied MGF, and to price in-sample options and forecast out-of-sample option prices with the estimated MGF.

Keywords: Wavelet; analysis; Option; pricing; Laplace; transform (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:3:p:692-709

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