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| Author: | Melick, W. R. Thomas, C. P. |
| Title: | Recovering an asset's implied PDF from option prices: an application to crude oil during the Gulf crises |
| Journal: | Journal of Financial and Quantitative Analysis
1997 : MAR, VOL. 32:1, p. 91-115 |
| Index terms: | OPTION PRICES FUTURE ASSETS PROBABILITY |
| Language: | eng |
| Abstract: | This study develops a method for using option prices to estimate the market's probability distribution for the underlying asset's price. The method allows the standard lognormal distribution to be replaced by any distribution from within a wide class. The particular assumption of a mixture of lognormal distributions used here was driven by conditions in the oil market during the Persian Gulf crisis. It was found that the options markets were consistent with the market commentary at the time reflecting a significant probability of a major disruption in oil prices, in the application to the oil market. It was also found that the standard lognormal assumption did a poor job of characterizing the data compared with this study's method. |
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