ISBN 379080049X
TITLE: Market Expectations and Option Prices
AUTHOR: MANDLER
TOC:

1 Introduction 1
Part I Theoretical Foundations
2 Arbitrage Pricing and Risk-Neutral Probabilities 7
2.1 Arbitrage Pricing in the Black/Scsholes-Merton Model 7
2.2 The Equivalent Martingale Measure and Risk-Neutral Valuation 11
2.3 Extracting Risk-Neutral Probabilities from Option Prices 13
2.4 Summary 15
Appendix 2A: The Valuation Function in the Black/Scholes-Merton Model 16
Appendix 2B: Some Further Details on the Replication Strategy 21
3 Survey of the Related Literature 23
3.1 The Information Content of Forward and Futures Prices 24
3.2 The Information Content of Implied Volatilities 25
3.2.1 Implied Volatilities and the Risk-Neutral Probability Density 27
3.2.2 The Term Structure of Implied Volatilities 29
3.2.3 The Forecasting Information in Implied Volatilities 30
3.2.4 Implied Correlations as Forecasts of Future Correlations 43
3.3 The Skewness Premium 45
3.4 Summary 47
4 Presenting and Interpreting Risk-Neutral Probabilities 51
4.1 Interpretation Problems Concerning Risk-Neutral Probabilities 51
4.2 Graphical Presentations of the Risk-Neutral Probability Density 54
4.3 Distributional Statistics and Percentiles 56
4.4 Summary 60
5 Techniques for Extracting Risk-Neutral Probabilities from Option Prices 63
5.1 The Direct Approach 64
5.2 Fitting Density Functions to Option Prices 64
5.2.1 Estimating Parametric Density Functions 64
5.2.2 Expansion Methods 72
5.2.3 Minimization of Deviations from a Prior Density 80
5.2.4 The Maximum-Smoothness Criterion 84
5.3 Estimating Option-Pricing Functions 86
5.3.1 Fitting Polynomials to the Volatility Smile 86
5.3.2 A Nonparametric Technique 90
5.3.3 The Maximum-Smoothness Criterion for the Volatility Smile 92
5.3.4 Further Extensions 93
5.4 Process-Based Techniques 94
5.4.1 Implied-Volatility Trees 94
5.4.2 Estimation of Stochastic Process Parameters 100
5.5 Data Selection and Preparation 101
5.6 Summary 104
Appendix 5A: Restrictions to Ensure a Positive Density in the Gram-Charlier Expansion 105
Appendix 5B: Deriving (5.120) and (5.123) 106
6 The Advantages and Disadvantages of Selected Techniques 109
6.1 Implementation 109
6.2 Comparing the Results 111
6.3 Robustness 114
6.4 Summary 117
Part II Empirical Applications
7 Important Empirical Applications - A Review 121
7.1 Exchange Rates 121
7.2 Interest Rates 126
7.3 Stock Indices 127
7.4 Risk Aversion 128
7.5 Summary 133
6 Central-Bank Council Meetings and Money Market Uncertainty 135
8.1 Estimation Method 136
8.2 Data 138
8.3 Results 140
8.4 Summary 146
9 Central-Bank Council Meetings Event Studies 149
9.1 Methodology and Data 149
9.2 Results 152
9.3 Summary 196
10 Summary and Conclusions 199
List of Figures 203
List of Tables 207
Bibliography 209
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