Estimating the Probability Distribution of the Future Exchange Rate from Option Prices

Malz, Allan M.

doi:10.3905/jod.1997.407988

Cited by 214 publications

(149 citation statements)

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“…In this regard, our results indicate that for this exchange rate both the Volatility Function Technique (VFT) postulated by Malz (1997) and the Generalized Extreme Value (GEV) approach proposed by Figlewski (2009) suggest similar dynamics at the center of the distribution; however, these two frameworks lead to significantly different patterns in the tails. Indeed, our empirical evidence supports that the GEV captures better the extreme values of the distribution around monetary policy event days, given its unique procedure to allow for longer asymptotically well-behaved tails.…”

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confidence: 63%

“…However, none of these papers compare different methodologies. While the latter applies the new approach of Figlewski (2009), the former uses the methodology of Malz (1997). In this regard, a practical comparison of methodologies is of special interest on days when fundamental information is released to the market because these days show different patterns in terms of the distribution of asset prices and 1 Taylor (2005) enumerates several desirable properties for RND estimation.…”

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confidence: 99%

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Exchange Rate Market Expectations and Central Bank Policy: The Case of the Mexican Peso/U.S. Dollar from 2005–2009

Abarca

Benavides

Rangel

2012

JOD

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confidence: 63%

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confidence: 99%

Exchange Rate Market Expectations and Central Bank Policy: The Case of the Mexican Peso/U.S. Dollar from 2005–2009

Abarca

Benavides

Rangel

2012

JOD

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“…Therefore, most efforts have been focused on interpolating option prices within the range of strike prices and extrapolating outside the range to estimate the entire distribution. See for instance, Shimko (1993), Malz (1997), Bates (1991), and Bliss and Panigirtzoglou (2002).…”

Section: Revealing the Risk-neutral Pdfmentioning

confidence: 99%

Revealing the implied risk-neutral MGF from options: The wavelet method

Haven

Liu

et al. 2009

Journal of Economic Dynamics and Control

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Options are believed to contain unique information on the risk-neutral moment generating function (MGF) or the risk-neutral probability density function (PDF) of the underlying asset. This paper applies the wavelet method to approximate the implied risk-neutral MGF from option prices.Monte Carlo simulations are carried out to show how the risk-neutral MGF can be obtained using the wavelet method. With the Black-Scholes model as the benchmark, we offer a novel method to reveal the implied MGF, and to price in-sample options and forecast out-of-sample option prices with the estimated MGF.JEL Classification: C02, C63, G13

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“…McCauley and Melick [1996] and Malz [1997] investigate general market sentiments in foreign exchange markets by quite literally interpreting graphs of the change in the shape of the risk-neutral distribution for different times. Bahra [1997] argues similarly when investigating the change in shape of the riskneutral distribution around announcements of an inflation report and of the German money supply (M3).…”

Section: Applicationsmentioning

confidence: 99%