Generating Options-Implied Probability Densities to Understand Oil Market Events

50 Pages Posted: 31 May 2017

See all articles by Deepa Datta

Deepa Datta

Board of Governors of the Federal Reserve System

Juan M. Londono

Board of Governors of the Federal Reserve System

Landon Ross

Board of Governors of the Federal Reserve System

Date Written: 2014-10-29

Abstract

We investigate the informational content of options-implied probability density functions (PDFs) for the future price of oil. Using a semiparametric variant of the methodology in Breeden and Litzenberger (1978), we investigate the fit and smoothness of distributions derived from alternative PDF estimation methods, and develop a set of robust summary statistics. Using PDFs estimated around episodes of high geopolitical tensions, oil supply disruptions, and macroeconomic data releases, we explore the extent to which oil price movements are expected or unexpected, and whether agents believe these movements to be persistent or temporary.

Keywords: Options-implied PDFs, futures, options, oil

JEL Classification: C13, G13, G14

Suggested Citation

Datta, Deepa and Londono-Yarce, Juan-Miguel and Ross, Landon, Generating Options-Implied Probability Densities to Understand Oil Market Events (2014-10-29). FRB International Finance Discussion Paper No. 1122, Available at SSRN: https://ssrn.com/abstract=2976816

Deepa Datta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Juan-Miguel Londono-Yarce

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Landon Ross

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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