Download or read book Recovering Probabilistic Information from Options Prices and the Underlying written by Bruce Mizrach and published by . This book was released on 2008 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines a variety of methods for extracting implied probability distributions from option prices and the underlying. The paper first explores non-parametric procedures for reconstructing densities directly from options market data. I then consider local volatility functions, both through implied volatility trees and volatility interpolation. I then turn to alternative specifications of the stochastic process for the underlying. I estimate a mixture of log normals model, apply it to exchange rate data, and illustrate how to conduct forecast comparisons. I finally turn to the estimation of jump risk by extracting bipower variation.