Generating Options-Implied Probability Densities to Understand Oil Market Events

Deepa Datta, Juan M. Londono and Landon J. Ross

No 1122, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate the informational content of options-implied probability density functions (PDFs) for the future price of oil. Using a semiparametric variant of the methodology in Breeden and Litzenberger (1978), we investigate the fit and smoothness of distributions derived from alternative PDF estimation methods, and develop a set of robust summary statistics. Using PDFs estimated around episodes of high geopolitical tensions, oil supply disruptions, and macroeconomic data releases, we explore the extent to which oil price movements are expected or unexpected, and whether agents believe these movements to be persistent or temporary.

Keywords: Options-implied PDFs; futures; options; oil (search for similar items in EconPapers)
JEL-codes: C13 G13 G14 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-10-29
New Economics Papers: this item is included in nep-ene
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Journal Article: Generating options-implied probability densities to understand oil market events (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1122

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