Probing Option Prices for Information

Hélyette Geman, Dilip B. Madan () and Marc Yor
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Hélyette Geman: University of London
Dilip B. Madan: University of Maryland
Marc Yor: Université Paris VI

Methodology and Computing in Applied Probability, 2007, vol. 9, issue 1, 115-131

Abstract: Abstract We present a methodology for extracting information from option prices when the market is viewed as knowledgeable. By expanding the information filtration judiciously and determining conditional characteristic functions for the log of the stock price, we obtain option pricing formulae which when fit to market data may reveal this information. In particular, we consider probing option prices for knowledge of the future stock price, instantaneous volatility, and the asymptotic dividend stream. Additionally the bridge laws developed are also useful for simulation based on stratified sampling that conditions on the terminal values of paths.

Keywords: bridge laws; credit; simulation; Bessel process; 60G05; 60G35; 60J70 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11009-006-9005-3

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