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Estimating Implied PDFs From American Options on Futures: A New Semiparametric Approach
Author(s) -
Flamouris Dimitris,
Giamouridis Daniel
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.2205
Subject(s) - log normal distribution , futures contract , econometrics , economics , distribution (mathematics) , asset (computer security) , futures market , probability density function , market data , mathematics , financial economics , statistics , computer science , mathematical analysis , computer security , finance
This article develops a new methodology for estimating implied probability density functions for futuresprices from American options. The restricting Black–Scholes assumption of a lognormal distribution for theunderlying asset is relaxed with the use of the more flexible distributional form of an Edgeworth seriesexpansion around a lognormal distribution. The model is applied to the crude oil market. The results providestrong evidence that the market consensus can be accurately reflected in the risk‐neutral densitiesrecovered from observed option prices. The recovered distributions are tested and found to differ significantlyfrom a single lognormal distribution. In addition, the recovered distributions are more robust than thoserecovered with a model, which assumes a mixture of two lognormal distributions. © 2002 John Wiley &Sons, Inc. Jrl Fut Mark 22:1–30, 2002