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 0378-4266

Full text not available from this repository.

Abstract

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
ISSN:	0378-4266
Date:	July 2004
Volume:	28
Number:	7
Number of Pages:	22
Page Range:	pp. 1499-1520
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/8349

Data sourced from Thomson Reuters' Web of Knowledge

Request changes to a record

Actions (login required)

View Item