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Simple and reliable way to compute option-based risk-neutral distributions
This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other implausible results. I give examples for equities, foreign exchange, and long-term interest rates.
Cite this item
Allan M. Malz, Simple and reliable way to compute option-based risk-neutral distributions, Federal Reserve Bank of New York, Staff Reports 677, 01 Jun 2014.
- G01 - Financial Economics - - General - - - Financial Crises
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
Keywords: option pricing; risk-neutral distributions
This item with handle RePEc:fip:fednsr:677
is also listed on EconPapers
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