Measuring expectations in options markets: An application to the SP500 index

Details Measuring expectations in options markets: An application to the SP500 index Measuring expectations in options markets: An application to the SP500 index

2008-12-31

arxiv.org/abs/0901.0033v1

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

Extracting market expectations has always been an important issue when making national policies and investment decisions in financial markets. In option markets, the most popular way has been to extract implied volatilities to assess the future variability of the underlying with the use of the Black and Scholes formula. In this manuscript, we propose a novel way to extract the whole time varying distribution of the market implied asset price from option prices. We use a Bayesian nonparametric method that makes use of the Sethuraman representation for Dirichlet processes to take into account the evolution of distributions in time. As an illustration, we present the analysis of options on the SP500 index.

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