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Option Prices and the Underlying Asset's Return Distribution
Author(s) -
GRUNDY BRUCE D.
Publication year - 1991
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1991.tb03776.x
Subject(s) - asset (computer security) , standard deviation , economics , econometrics , financial economics , distribution (mathematics) , basis risk , index (typography) , capital asset pricing model , mathematics , statistics , computer science , mathematical analysis , computer security , world wide web
This work examines the relation between option prices and the true, as opposed to risk‐neutral, distribution of the underlying asset. If the underlying asset follows a diffusion with an instantaneous expected return at least as large as the instantaneous risk‐free rate, observed option prices can be used to place bounds on the moments of the true distribution. An illustration of the paper's results is provided by the analysis of the information concerning the mean and standard deviation of market returns contained in the prices of S&P 100 Index Options.