DMCA
Option Implied . . . Implied Binomial Trees: A Literature Review (1999)
| Venue: | JOURNAL OF DERIVATIVES |
BibTeX
@ARTICLE{Jackwerth99optionimplied,
author = {Jens Carsten Jackwerth},
title = {Option Implied . . . Implied Binomial Trees: A Literature Review},
journal = {JOURNAL OF DERIVATIVES},
year = {1999},
pages = {66--82}
}
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Abstract
In this partial and selective literature review of option implied risk-neutral distributions and of implied binomial trees, we start by observing that in efficient markets, there is information contained in option prices, which might help us to design option pricing models. To this end, we review the numerous methods of recovering risk-neutral probability distributions from option prices at one particular time-to-expiration and their applications. Next, we extend our attention beyond one time-to-expiration to the construction of implied binomial trees, which model the stochastic process of the underlying asset. Finally, we describe extensions of implied binomial trees, which incorporate stochastic volatility, as well as other non-parametric methods.
Keyphrases
implied binomial tree literature review binomial tree option price numerous method particular time-to-expiration stochastic volatility option pricing model efficient market stochastic process selective literature review risk-neutral probability distribution risk-neutral distribution non-parametric method underlying asset
