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|Title:||Revealing the Implied Risk-neutral MGF from Options: the Wavelet Method|
|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 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.|
|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 http://www.sciencedirect.com. Doi: 10.1016/j.jedc.2008.09.001|
|Appears in Collections:||Published Articles, School of Management|
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