The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Recovering Probability Distributions from Option Prices
Published: 12/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05219.x
JENS CARSTEN JACKWERTH, MARK RUBINSTEIN
This article derives underlying asset risk‐neutral probability distributions of European options on the S&P 500 index. Nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices. Alternative optimization specifications produce approximately the same implied distributions. A new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed. Since the crash, the risk‐neutral probability of a three (four) standard deviation decline in the index (about −36 percent (−46 percent) over a year) is about 10 (100) times more likely than under the assumption of lognormality.
Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence
Published: 07/19/2011 | DOI: 10.1111/j.1540-6261.2011.01665.x
GEORGE M. CONSTANTINIDES, MICHAL CZERWONKO, JENS CARSTEN JACKWERTH, STYLIANOS PERRAKIS
American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2009) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out‐of‐sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk‐averse investor holding the market and cash, net of transaction costs and bid‐ask spreads. The results are economically significant and robust.