Abstract:A large literature exists on techniques for extracting probability distributions for future asset prices from option prices. No definitive method has been developed however. The parametric ‘mixture of normals’, and nonparametric ‘smoothed implied volatility’ methods remain the most widespread approaches. These though are subject to estimation errors due to discretization, truncation, and noise. Recently, several authors have derived ‘model free’ formulae for computing the moments of the risk neutral density (R… Show more
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