Using Illiquid Option Prices to Recover Probability Distributions

摘要: This paper describes a method for recovering the risk neutral market’s perceived probability distribution (RND) of European options on FTSE100 Index an hourly time basis. A nonparametric procedure is used to choose probabilities that minimise objective function subject requiring obtained comply with observed option prices. The based idea distributions asset returns can be expressed as mixture lognormal variables. use provides natural and robust way model fat tails, key feature financial returns. optimisation technique estimating incorporates “smoothness” “variability” factor in account situations where little smoothness high variability posterior are plausible due problems data, such illiquidity. With this we able resolve some numerical difficulties presented by earlier procedures, plot consistent pictures timely fashion implied measure first four moments future FTSE 100 market.