In this paper we obtain the risk-neutral density of an underlying asset price as a function of its option implied volatility. We derive a known expression for the density and decompose it into a sum of lognormal and adjustment terms. We also derive no-arbitrage conditions on the volatility smile. We then explain how to use the results. Our methodology is applied to the pricing of a portfolio of digital options. It is then applied to the fitting of a distribution for log-return modelling.Keywords: Option pricing; No arbitrage; Risk-neutral distribution; Implied volatility smile.JEL: C14; C52; G13
Auteurs :Tavin Bertrand Extrait de la revue BMI 119
The Performance of Islamic Investment: Evidence from the Dow Jones Islamic Indexes Volatility Strategies for Global and Country Specific European Investors Problem Loans in the MENA Countries: Bank Specifi c Determinants and the Role of the Business and the Institutional Environment Short Term Wealth Creation Sustainability of French Acquirers of Unlisted versus Listed Firms Financial flexibility
The Performance of Islamic Investment: Evidence from the Dow Jones Islamic Indexes Volatility Strategies for Global and Country Specific European Investors Problem Loans in the MENA Countries: Bank Specifi c Determinants and the Role of the Business and the Institutional Environment Short Term Wealth Creation Sustainability of French Acquirers of Unlisted versus Listed Firms Financial flexibility
