Hello to all,
I fully agree with J.P. Bouchaud and M. Potters's comment :
"
2) About J. James comment. We strongly disagree with the common view
that:
`` the historical distribution is irrelevant when it comes to option
pricing. Only the implied distribution (that which can be derived from
option prices in the market) is relevant ''
which is the dogma of modern finance. This is simply not true. The
historical
distribution is relevant, and actually in many cases very close to the
implied
distribution, provided one has a good model for it
""
In fact, M. Rubinstein and J Jackwerth showed that if you retrieve the empirical risk neutral distribution from options prices and compare it with the historical distribution, one can extract the implied risk aversion of the market. Thus the historical distribution plus the risk aversion can give you the implied distribution. By the way, they show that the market is actually mis-pricing these option contracts since most risk aversions are negative !!
A copy of this article can be found in the article database of the finance and physics web site.
Cheers,
Jerome Legras
CCF Recherche et Innovation
15 rue Vernet 75008 Paris
Tel 40 70 34 89
Fax 40 70 30 31
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