Using option prices to measure financial market views about balances of risk to future asset prices

Probability density functions (pdfs), implied by prices of traded options, are often used by the Bank to examine financial market expectations about future levels of different asset prices. This article examines how information about one aspect of such expectations - views on balances of risk - for...

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Bibliographic Details
Published in:Bank of England quarterly bulletin 2004-01, Vol.44 (4), p.442-454
Main Authors: Lynch, Damien, Panigirtzoglu, Nikolaos, Kapetanios, George
Format: Article
Language:English
Subjects:
Assets
Asymmetry
Capital market
Central banks
Finance
Interest rates
Options on stocks
Options trading
Prices
Probability
Random variables
Risk
Securities markets
Securities prices
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Summary:Probability density functions (pdfs), implied by prices of traded options, are often used by the Bank to examine financial market expectations about future levels of different asset prices. This article examines how information about one aspect of such expectations - views on balances of risk - for future asset prices may be inferred from the degree of asymmetry of an implied pdf. We first look at the general issue of choosing a statistic to summarise the degree of asymmetry of any pdf. The choice of units when measuring changes in the underlying asset price is then considered. Finally, we examine empirically the implications of using various asymmetry measures when relating the information from option-implied pdfs to market views about balances of risk to future asset prices. [PUBLICATION ABSTRACT]
ISSN:0005-5166
2399-4568