A new approach to modeling the dynamics of implied distributions: Theory and evidence from the S&P 500 options
UNSPECIFIED (2004) A new approach to modeling the dynamics of implied distributions: Theory and evidence from the S&P 500 options. JOURNAL OF BANKING & FINANCE, 28 (7). pp. 1499-1520. ISSN 0378-4266Full text not available from this repository.
Official URL: http://dx.doi.org/10.1016/S0378-4266(03)00127-4
This paper presents a new approach to modeling the dynamics of implied distributions. First, we obtain a parsimonious description of the dynamics of the S&P 500 implied cumulative distribution functions by applying principal components analysis. Subsequently, we develop new arbitrage-free Monte Carlo simulation methods that model the evolution of the whole distribution through time as a diffusion process. Our approach generalizes the conventional approaches of modeling only the first two moments as diffusion processes, and it has important implications for "smile-consistent" option pricing and for risk management. The out-of-sample performance within a Value-at-Risk framework is examined. (C) 2003 Elsevier B.V. All rights reserved.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions
|Journal or Publication Title:||JOURNAL OF BANKING & FINANCE|
|Publisher:||ELSEVIER SCIENCE BV|
|Number of Pages:||22|
|Page Range:||pp. 1499-1520|
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