Economics at Xiamen University


Revealing the Implied Risk-neutral MGF from Options: The Wavelet Method
Emmanuel Haven, XiaoquanLiu, Chenghu Ma, LiyaShen
Journal of Economic Dynamics & Control 33(2009) 692–709.
#002097 20131014 (published) Views:136
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 therisk-neutralMGFcanbeobtainedusingthewaveletmethod.Withthe Black–Scholes model as the benchmark, we offer anovel method to reveal the implied MGF,and to price in-sample options and forecast out-of-sample option prices with the estimated MGF.
Keywords: Waveletanalysis; Option pricing; Laplace transform.

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