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Revealing the implied risk-neutral MGF from options: The wavelet method

Haven, E and Liu, X and Ma, C and Shen, L (2009) 'Revealing the implied risk-neutral MGF from options: The wavelet method.' Journal of Economic Dynamics and Control, 33 (3). 692 - 709. ISSN 0165-1889

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Abstract

Options are believed to contain unique information on the risk-neutral moment generating function (MGF) or the risk-neutral probability density function (PDF) of the underlying asset. This paper applies the wavelet method to approximate the implied risk-neutral MGF from option prices. Monte Carlo simulations are carried out to show how the risk-neutral MGF can be obtained using the wavelet method. With the Black-Scholes model as the benchmark, we offer a novel method to reveal the implied MGF, and to price in-sample options and forecast out-of-sample option prices with the estimated MGF. © 2008 Elsevier B.V. All rights reserved.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Liya Shen
Date Deposited: 11 Nov 2011 09:55
Last Modified: 30 Jan 2019 16:16
URI: http://repository.essex.ac.uk/id/eprint/1285

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