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Option Implied Trees and Implied Moments

Author

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  • silvia Muzzioli
  • Alessio Ruggieri

Abstract

Implied trees are simple non-parametric discretizations of one- or two-dimension diffusions, aimed at introducing non-constant volatility in an option pricing model. The aim of the paper is twofold. First we investigate the ability of different option implied trees in pricing European options. Second, we compare the implied moments obtained with the use of option implied trees with the risk–neutral moments obtained with the use of Bakshi et al. (2003) formula and with realised physical moments. The comparison is pursued in the Italian market by analysing a data set which covers the years 2005-2009 and span both a relatively tranquil and a turmoil period.

Suggested Citation

  • silvia Muzzioli & Alessio Ruggieri, 2013. "Option Implied Trees and Implied Moments," Department of Economics (DEMB) 0015, University of Modena and Reggio Emilia, Department of Economics "Marco Biagi".
    • Handle: RePEc:mod:dembwp:0015
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    References listed on IDEAS

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    Cited by:

    1. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2015. "Towards a skewness index for the Italian stock market," Department of Economics 0064, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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    More about this item

    Keywords

    option implied trees; risk neutral moments; financial turmoil.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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