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Implied Binomial Trees

Mark Rubinstein
1994 Journal of Finance  
Fourth, the optimization method used here for inferring ending nodal probabilities from option prices permits interpolation and extrapolation based on a subjective prior in combination with the prices  ...  the tree to infer consistent values for options maturing earlier in the tree.  ...  Appendix II Numerical Example of an Implied Binomial Tree  ... 
doi:10.2307/2329207 fatcat:nvl5vufa5ndnzaflha7oa26i4i

Implied Binomial Trees

MARK RUBINSTEIN
1994 Journal of Finance  
Fourth, the optimization method used here for inferring ending nodal probabilities from option prices permits interpolation and extrapolation based on a subjective prior in combination with the prices  ...  the tree to infer consistent values for options maturing earlier in the tree.  ...  Appendix II Numerical Example of an Implied Binomial Tree  ... 
doi:10.1111/j.1540-6261.1994.tb00079.x fatcat:6gfxcvujyvdnnfozlw5fcnvfkq

Cross-sectional tests of deterministic volatility functions

Michael W Brandt, Tao Wu
2002 Journal of Empirical Finance  
For each date in our sample of FTSE 100 index option prices, we fit an implied binomial tree to the panel of all European style options with different strike prices and maturities and then examine how  ...  We find that the implied binomial tree model performs no better than an ad-hoc procedure of smoothing Black -Scholes implied volatilities across strike prices and maturities.  ...  Nonparametric estimation of state-price densities implicit in financial asset prices. Journal of Finance 53, 499 -548.  ... 
doi:10.1016/s0927-5398(02)00009-9 fatcat:bkkj3deuirflhnemtamxnbyhma

Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices

Yacine Aït-Sahalia, Andrew W. Lo
1998 Journal of Finance  
We construct a nonparametric estimator for the SPD implicit in option prices and we derive its asymptotic sampling theory.  ...  example, negative skewness and excess kurtosis for asset returns, and volatility "smiles" for option prices.  ...  Nonparametric Specification Test of the Black-Scholes Model Nonparametric specification tests of the Black-Scholes option-pricing model based on the option-pricing formula H BS and its corresponding delta  ... 
doi:10.1111/0022-1082.215228 fatcat:zamkndk5mfhvlg5or3wqlmyppq

Recovering Stochastic Processes from Option Prices [chapter]

Jens Carsten Jackwerth, Mark Rubinstein
2012 Derivative Securities Pricing and Modelling  
implied binomial trees to explain otherwise identical observed option prices that dijfer by strike prices, times-to-expiration, or times.  ...  Further improvements to the models seem to require predicting the future at-the-money implied volatility.  ...  For helpful comments the authors would like to thank an anonymous referee, David Brown, Jim Hodder, David Modest and seminar participants 152 at the AFA meetings 1996, Berkeley Program in Finance 1998,  ... 
doi:10.1108/s1569-3759(2012)0000094008 fatcat:w4phco43jvh3zc7wrc3pc6jhlu

The Econometrics of Option Pricing

René Garcia, Eric Ghysels, Eric Renault
2003 Social Science Research Network  
We start from the popular preference-free binomial option pricing model and show how implied binomial trees can be understood through the SDF approach.  ...  on current cross-sections of option prices to infer the SPD.  ... 
doi:10.2139/ssrn.463860 fatcat:jf7vikole5fzrnw5dey2q4q6se

The Econometrics of Option Pricing [chapter]

René Garcia, Eric Ghysels, Eric Renault
2010 Handbook of Financial Econometrics: Tools and Techniques  
We start from the popular preference-free binomial option pricing model and show how implied binomial trees can be understood through the SDF approach.  ...  on current cross-sections of option prices to infer the SPD.  ... 
doi:10.1016/b978-0-444-50897-3.50012-2 fatcat:oyzapebuynbjvfgwc5aefkohtq

Estimating Implied Probabilities from Option Prices and the Underlying [chapter]

Bruce Mizrach
2010 Handbook of Quantitative Finance and Risk Management  
The paper first explores nonparametric procedures for reconstructing densities directly from options market data.  ...  This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying.  ...  Acknowledgements I would like to thank seminar participants at the OCC, Federal Reserve Bank of Philadelphia, and the FDIC Derivative Securities and Risk Management Conference for helpful comments.  ... 
doi:10.1007/978-0-387-77117-5_35 fatcat:lklnjyqntbdvlbreyyz7cyxhzi

Recovering Probabilistic Information from Options Prices and the Underlying

Bruce Mizrach
2008 Social Science Research Network  
Abstract This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying.  ...  The paper ...rst explores non-parametric procedures for reconstructing densities directly from options market data.  ...  Tree Methods 6.1 A standard tree I begin the discussion by de…ning a notation for a standard binomial tree. Let S 0;0 denote the current spot price.  ... 
doi:10.2139/ssrn.973260 fatcat:vejocvqk4bctpnehnkc5c64d5e

Nonparametric Predictive Inference for Asian options [article]

Ting He
2020 arXiv   pre-print
Nonparametric Predictive Inference (NPI) is applied to infer the average value of the future underlying asset price, which attempts to make the prediction reflecting more uncertainty because of the limited  ...  Asian option, as one of the path-dependent exotic options, is widely traded in the energy market, either for speculation or hedging.  ...  Preliminaries Nonparametric Predictive Inference (NPI) is an inferential framework based on the assumption A (n) (Hill, 1968) , which directly provides probabilities for future observations by using few  ... 
arXiv:2008.13082v1 fatcat:tboojnkypvdjdkq7qjrkzyehsa

The Implied Risk Neutral Density Dynamics: Evidence from the S&P TSX 60 Index

Nessim Souissi
2017 Journal of Applied Mathematics  
In this paper, we present a new method for the extraction information content from option prices.  ...  By eliminating bias caused by daily variation of contract maturity through a completely nonparametric technique based on kernel regression, we allow comparing evolution of risk neutral density and extracting  ...  Jackwerth and Rubinstein [14] proposed a method based on binomial trees. Madan and Milne [15] and Abken et al. [16] obtained the risk neutral density from Hermite polynomial approximation.  ... 
doi:10.1155/2017/3156250 fatcat:wqszrrrcdrf7zafrxzve5ax2u4

A Bayesian nonparametric approach to option pricing

Zhang Qin, Caio Almeida
2020 Revista Brasileira de Finanças  
We also obtain posterior distributions of the implied volatility and build confidence intervals for the predictions to assess potential model uncertainty.  ...  Accurately modeling the implied volatility surface is of great importance to option pricing, trading and hedging.  ...  Although simple closed-form solutions are not always available, it is possible to calibrate the model with binomial-tree-based approaches or through Monte Carlo simulations.  ... 
doi:10.12660/rbfin.v18n4.2020.81913 fatcat:w5ppeknyhnfg7cnehm2avg7gq4

Density forecast comparisons for stock prices, obtained from high-frequency returns and daily option prices

Rui Fan, Stephen J. Taylor, Matteo Sandri
2017 Journal of futures markets  
This paper presents the first comparison of the accuracy of density forecasts for stock prices. Six sets of forecasts are evaluated for DJIA stocks, across four forecast horizons.  ...  Two forecasts are risk-neutral densities implied by the Black-Scholes and Heston models.  ...  Section 2 describes the density forecasting methods, namely the Black-Scholes (1973) and Heston (1993) models for densities inferred from option prices, the Corsi (2009) HAR-RV model for density forecasts  ... 
doi:10.1002/fut.21859 fatcat:bg3u6kyrlfhg5fwh64zwldxpg4

Option prices under Bayesian learning: implied volatility dynamics and predictive densities

Massimo Guidolin, Allan Timmermann
2003 Journal of Economic Dynamics and Control  
In the context of an equilibrium model where dividend news evolve on a binomial lattice with unknown but recursively updated probabilities we derive closed-form pricing formulas for European options.  ...  Data on S&P 500 index option prices is used to back out the parameters of the underlying learning process and to predict the evolution in the cross-section of option prices.  ...  Although dividend yields are now time-varying, in principle binomial methods could still be used to obtain the no-arbitrage price of European options on flexible trees (see, e.g., Chriss (1997)).  ... 
doi:10.1016/s0165-1889(01)00069-0 fatcat:ayvl2vdwrngfxmdaqgwdbyuc6y

Option Prices under Bayesian Learning: Implied Volatility Dynamics and Predictive Densities

Allan G. Timmermann, Massimo Guidolin
2001 Social Science Research Network  
In the context of an equilibrium model where dividend news evolve on a binomial lattice with unknown but recursively updated probabilities we derive closed-form pricing formulas for European options.  ...  Data on S&P 500 index option prices is used to back out the parameters of the underlying learning process and to predict the evolution in the cross-section of option prices.  ...  Although dividend yields are now time-varying, in principle binomial methods could still be used to obtain the no-arbitrage price of European options on flexible trees (see, e.g., Chriss (1997)).  ... 
doi:10.2139/ssrn.264655 fatcat:ea627chmdzbb3oumt74btjbaki
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