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

41 Pages Posted: 21 Jul 2004  

Daniel Giamouridis

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

Date Written: January 2004

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.

JEL Classification: G10, G12, G13, G14

Suggested Citation

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

Daniel Giamouridis (Contact Author)

Bank of America - Bank of America Merrill Lynch ( email )

United Kingdom

Athens University of Economics and Business ( email )

Department of Accounting and Finance
Greece

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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