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Title: Option-implied physical probabilities Authors:  Richard McGee - University College Dublin (Ireland) [presenting]
Thierry Post - Koc University (Turkey)
Valerio Poti - DCU (Italy)
Abstract: A new analytical framework for forecasting the probability distribution of equity index returns is presented and applied using index option prices in an imperfect and incomplete market. The implied probabilities enhance a range of standard density forecasts in terms of out-of-sample predictive ability by including forward-looking pricing information. The economic significance of the improved forecasting strength manifests itself in improvements for Value-at-Risk calculations for index investors and delta hedging by market makers.