Options and the Gamma Knife

Ian Martin

No 12883, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: I survey work of Steve Ross (1976) and of Douglas Breeden and Robert Litzenberger (1978) that first showed how to use options to synthesize more complex securities. Their results made it possible to infer the risk-neutral measure associated with a traded asset, and underpinned the development of the VIX index. The other main result of Ross (1976), which shows how to infer joint risk-neutral distributions from option prices, has been much less influential. I explain why, and propose an alternative approach to the problem. This paper is dedicated to Steve Ross, and was written for a special issue of the Journal of Portfolio Management in memory of him.

Keywords: Option prices; Gamma knife; Arrow-debreu securities; Risk-neutral distribution; Vix; Svix; Radon transform; Derivatives (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2018-04
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Citations: View citations in EconPapers (2)

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