Option-implied probability distributions: How reliable? How jagged?

Marco Taboga

International Review of Economics & Finance, 2016, vol. 45, issue C, 453-469

Abstract: Estimates of option-implied probability distributions are routinely used in central banks, as well as in other institutions, but their reliability is often difficult to assess. To address this issue, we propose a semi-nonparametric model that allows to compute exact credible intervals around estimated distributions. By analyzing a panel of S&P 500 options, we find that the estimates of the distributions are quite precise. We also provide evidence that the multi-modality often found in option-implied distributions could be an artifact due to over-fitting, and that models with uni-modality constraints have high posterior odds.

Keywords: Implied state prices; Implied risk-neutral distributions; State price estimation; Option-implied distributions (search for similar items in EconPapers)
JEL-codes: C14 C58 G13 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056016300685
Full text for ScienceDirect subscribers only

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:eee:reveco:v:45:y:2016:i:c:p:453-469

DOI: 10.1016/j.iref.2016.07.013

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().