Journal ArticleDOI
Implied Binomial Trees
Reads0
Chats0
TLDR
In this article, a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options is developed. But this method requires the assumption that the underlying asset has a limited risk-free lognormal distribution.Abstract:
This article develops a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options. These probabilities are then used to infer a unique fully specified recombining binomial tree that is consistent with these probabilities (and, hence, consistent with all the observed option prices). A simple backwards recursive procedure solves for the entire tree. From the standpoint of the standard binomial option pricing model, which implies a limiting risk-neutral lognormal distribution for the underlying asset, the approach here provides the natural (and probably the simplest) way to generalize to arbitrary ending risk-neutral probability distributions.read more
Citations
More filters
Journal ArticleDOI
Empirical Performance of Alternative Option Pricing Models
TL;DR: In this article, an option pricing model that allows volatility, interest rates and jumps to be stochastic is presented. But it is not known whether and by how much each generalization improves option pricing and hedging.
Journal ArticleDOI
Non-Gaussian Ornstein–Uhlenbeck-based models and some of their uses in financial economics
TL;DR: The authors construct continuous time stochastic volatility models for financial assets where the volatility processes are superpositions of positive Ornstein-Uhlenbeck (OU) processes, and study these models in relation to financial data and theory.
Journal ArticleDOI
The Variance Gamma Process and Option Pricing
TL;DR: In this article, a three-parameter stochastic process, termed the variance gamma process, is developed as a model for the dynamics of log stock prices, which is obtained by evaluating Brownian motion with drift at a random time given by a gamma process.
Journal ArticleDOI
Post-'87 crash fears in the S&P 500 futures option market
TL;DR: In this paper, the authors examined two alternate explanations: stochastic volatility and jumps, and fitted them to S&P 500 futures options data over 1988-1993 and found that the stochassy volatility model requires extreme parameters (e.g., high volatility of volatility) that are implausible given the time series properties of option prices.
Journal ArticleDOI
An Overview of Value at Risk
Darrell Duffie,Jun Pan +1 more
TL;DR: In this article, a broad and accessible overview of models of value at risk (WR), a popular measure o f the market risk of a financial firm's book, the list of positions in various instruments that expose the firm to financial risk, is presented.
References
More filters
Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Journal ArticleDOI
Option pricing: A simplified approach☆
TL;DR: In this paper, a simple discrete-time model for valuing options is presented, which is based on the Black-Scholes model, which has previously been derived only by much more difficult methods.
Journal ArticleDOI
The valuation of options for alternative stochastic processes
John C. Cox,Stephen A. Ross +1 more
TL;DR: In this paper, the authors examined the structure of option valuation problems and developed a new technique for their solution and introduced several jump and diffusion processes which have not been used in previous models.
Posted Content
Prices of State-Contingent Claims Implicit in Option Prices
TL;DR: In this article, the authors derive the prices of primitive securities from call options on aggregate consumption, and derive an equilibrium valuation of assets with uncertain payoffs at many future dates by using the Black-Scholes equation.
Journal ArticleDOI
Prices of state-contingent claims implicit in option prices
TL;DR: In this article, the Black-Scholes equation for options on aggregate consumption has been used to derive the prices of primitive securities from the price of call options on aggregated consumption.