Comparing Risk-Neutral Probability Density Functions Implied by Option Prices - Market Uncertainty and Ecb-Council Meetings

Abstract

In recent years different techniques to uncover the information on market expectations implicit in option prices have been developed. This paper proposes an approach to highlight statistically significant changes in risk-neutral probability density functions by comparing the distributional characteristics of statistics derived from risk-neutral densities to those of a benchmark sample. In an application we extract risk-neutral probability density functions from LIFFE-Euribor futures options and look for characteristic differences in market expectations related to meetings of the Governing Council of the ECB.