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Beyond implied volatility: extracting information from option prices

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  • Rama CONT

    (Swiss Federal Institute of Technology)

Abstract

After a brief review of option pricing theory, we introduce various methods proposed for extracting the statistical information implicit in options prices. Among the methods discussed are: lognormal Edgeworth expansions, cumulant expansions, Hermite polynomial expansions, nonparametric kernel estimation of state price densities and maximum entropy methods. We discuss the advantages and drawbacks of each method, the interpretation of their results in economic terms, their theoretical consequences and their relevance for applications. The style is introductory and self-contained.

Suggested Citation

  • Rama CONT, 1998. "Beyond implied volatility: extracting information from option prices," Finance 9804002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9804002
    Note: Type of Document - LaTex; prepared on UNIX Sparc TeX; to print on PostScript; pages: 26 ; figures: included. Lecture given at Eotvos university, Budapest in July 1997. Also available from:
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    References listed on IDEAS

    as
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    Cited by:

    1. Salazar Celis, Oliver & Liang, Lingzhi & Lemmens, Damiaan & Tempère, Jacques & Cuyt, Annie, 2015. "Determining and benchmarking risk neutral distributions implied from option prices," Applied Mathematics and Computation, Elsevier, vol. 258(C), pages 372-387.
    2. Amine Bouden, 2008. "The Behavior Of The Implied Volatility Surface: Evidence From Crude Oil Futures Options," World Scientific Book Chapters, in: Mondher Bellalah & Jean-Luc Prigent & Jean-Michel Sahut & Georges Pariente & Olivier Levyne & Michel (ed.), Risk Management And Value Valuation and Asset Pricing, chapter 8, pages 151-175, World Scientific Publishing Co. Pte. Ltd..
    3. Vladimir Zdorovenin & Jacques Pézier, 2011. "Does Information Content of Option Prices Add Value for Asset Allocation?," ICMA Centre Discussion Papers in Finance icma-dp2011-03, Henley Business School, University of Reading.

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    Keywords

    Option pricing;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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