Working Paper No. 345
By Damien Lynch and Nikolaos Panigirtzoglou
The statistics that summarise probability density functions (pdfs) implied from option prices can be used to assess market expectations about future uncertainty, asymmetry and the probability of extreme movements in asset prices. A time-series analysis of these statistics for equity index and interest rate markets provides some stylised facts about the behaviour of these elements of market expectations, their historical distribution, similarity and relative stability. Relationships between them and movements in underlying asset prices are considered. Cross-asset and cross-country comparisons and the information content of the implied pdfs for future macroeconomic and financial variables are also assessed.
Summary statistics of option-implied probability density functions and their properties