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Title: Revealing the Implied Risk-neutral MGF from Options: the Wavelet Method
Authors: Haven, Emmanuel
Liu, Xiaoquan
Ma, Chenghu
Shen, Liya
First Published: Mar-2009
Publisher: Elsevier Science B.V., Amsterdam
Citation: Journal of Economic Dynamics & Control, 2009, 33 (3), pp. 692-709
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 BlackÔÇôScholes 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.
DOI Link: 10.1016/j.jedc.2008.09.001
ISSN: 0165-1889
Type: Article
Rights: This is the author's final draft of the paper published as Journal of Economic Dynamics & Control, 2009, 33 (3), pp. 692-709. The final version is available from Doi: 10.1016/j.jedc.2008.09.001
Appears in Collections:Published Articles, School of Management

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