Abstract

http://ssrn.com/abstract=566481
 
 

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Implied PDFs: Estimation, Testing and Applications in the Eurodollar Market


Daniel Giamouridis


Athens University of Economics and Business; City University London - Cass Business School - Faculty of Finance; EDHEC Risk Institute

January 2004

Cass Business School Research Paper

Abstract:     
This paper develops a method for estimating implied PDFs for futures prices from American options. The restricting assumption of log-normally distributed returns is relaxed with the use of the more flexible distributional form of an Edgeworth Series Expansion (ESE) of a log-normal distribution. The method is applied to Eurodollar futures options market data and a plethora of tests is employed to explore its capacity. The proposed model is found to be able to estimate PDFs that can capture the general market sentiment and also incorporate isolated events causing a significant impact on the market. In addition to exploring the 'economic' sensibility of the recovered densities, their statistical properties are examined against the properties of PDFs estimated with the use of alternative methodologies. A superior behaviour is present in most of the cases addressed. Based on the proposed model, a new setting that allows to explicitly quantify the information content of option prices is also developed.

Number of Pages in PDF File: 41

JEL Classification: G10, G12, G13, G14

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Date posted: July 21, 2004  

Suggested Citation

Giamouridis, Daniel, Implied PDFs: Estimation, Testing and Applications in the Eurodollar Market (January 2004). Cass Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=566481 or http://dx.doi.org/10.2139/ssrn.566481

Contact Information

Daniel Giamouridis (Contact Author)
Athens University of Economics and Business ( email )
Department of Accounting and Finance
76 Patission Street
Athens, 10434
Greece
+30 210 820 3925 (Phone)
+30 210 820 3936 (Fax)
HOME PAGE: http://www.aueb.gr/users/dgiamour/
City University London - Cass Business School - Faculty of Finance ( email )
London, EC2Y 8HB
Great Britain
EDHEC Risk Institute ( email )
Lille
France
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