Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review

Jens Carsten Jackwerth

MPRA Paper from University Library of Munich, Germany

Abstract: In this selective literature review, we start by observing that in efficient markets, there is information incorporated in option prices that might help us to design option pricing models. To this end, we review the numerous methods of recovering risk-neutral probability distributions from option prices at one particular time to expiration and their applications. Next, we move beyond one time to expiration to the construction of implied binomial trees, which model the stochastic process of the underlying asset. Finally, we describe extensions of implied binomial trees, and other non-parametric methods.

Keywords: Binomial Trees; Risk-Neutral (search for similar items in EconPapers)
JEL-codes: D81 G32 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (100)

Published in Journal of Derivatives 2.7(1999): pp. 66-82

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11634

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