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Media type:
E-Book
Title:
Estimating Probability Distributions of Future Asset Prices
:
Empirical Transformations from Option-Implied Risk-Neutral to Real-World Density Functions
Published in:Bank of England Working Paper ; No. 455
Extent:
1 Online-Ressource (39 p)
Language:
English
DOI:
10.2139/ssrn.2093397
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments June 21, 2012 erstellt
Description:
The prices of derivatives contracts can be used to estimate ‘risk-neutral' probability density functions that give an indication of the weight investors place on different future prices of their underlying assets, were they risk-neutral. In the likely case that investors are risk-averse, this leads to differences between the risk-neutral probability density and the actual distribution of prices. But if this difference displays a systematic pattern over time, it may be exploited to transform the risk-neutral density into a ‘real-world' density that better reflect agents' actual expectations. This work offers a methodology for performing this transformation. The resulting real-world densities may better represent market participants' views of future prices, and so offer an enhanced means of quantifying the uncertainty around financial variables. Comparison with their risk-neutral equivalents may also reveal new and useful information as to how attitudes towards risk are affecting pricing