Measuring Expectations in Options Markets: An Application to the S&P500 Index

Posted: 22 Dec 2008

See all articles by Abel Rodriguez

Abel Rodriguez

University of California, Santa Cruz

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration

Date Written: December 19, 2008

Abstract

Extracting market expectations has always been an important issue when making national policies and investment decisions in financial markets. In option markets, the most popular way has been to extract implied volatilities to assess the future variability of the underlying with the use of the Black & Scholes formula. In this manuscript, we propose a novel way to extract the whole time varying distribution of the market implied asset price from option prices. We use a Bayesian nonparametric method that makes use of the Sethuraman representation for Dirichlet processes in order to take into account the evolution of probability distributions in time. As an illustration, we present the analysis of options on the S&P500 index.

Keywords: Nonparametric Bayes, Dependent Dirichlet process, European Options, Implied Prices

JEL Classification: C40

Suggested Citation

Rodriguez, Abel and ter Horst, Enrique, Measuring Expectations in Options Markets: An Application to the S&P500 Index (December 19, 2008). Available at SSRN: https://ssrn.com/abstract=1318278

Abel Rodriguez (Contact Author)

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

Enrique ter Horst

Universidad de los Andes, Colombia - School of Business Administration ( email )

Bogota
Colombia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
735
PlumX Metrics