Estimating probability distributions of future asset prices: empirical transformations from option-implied risk-neutral to real-world density functions

de Vincent-Humphreys, Rupert; Noss, Joseph
August 2012
Bank of England Quarterly Bulletin;2012 3rd Quarter, Vol. 52 Issue 3, p246
Academic Journal
The article discusses the efforts of the Bank of England in estimating probability density functions (pdfs) from options prices in order to obtain an indication of the weight investors place on different future prices. It also compares the risk-neutral distribution generated directly from options prices to the actual distribution of prices. It informs that pdfs give an indication of the probabilities investors if they were risk-neutral.


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