Working Paper: CEPR ID: DP12883
Authors: Ian Martin
Abstract: I survey work of Steve Ross (1976) and of Douglas Breeden and Robert Litzenberger (1978) that first showed how to use options to synthesize more complex securities. Their results made it possible to infer the risk-neutral measure associated with a traded asset, and underpinned the development of the VIX index. The other main result of Ross (1976), which shows how to infer joint risk-neutral distributions from option prices, has been much less influential. I explain why, and propose an alternative approach to the problem. This paper is dedicated to Steve Ross, and was written for a special issue of the Journal of Portfolio Management in memory of him.
Keywords: option prices; gamma knife; arrow-debreu securities; risk-neutral distribution; vix; svix; radon transform; derivatives
JEL Codes: G10; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| options (Y60) | market efficiency (G14) |
| options (Y60) | risk-neutral distribution (D39) |
| risk-neutral distribution from European option prices (D39) | joint distribution of multiple assets (C46) |
| options (Y60) | market completion (G10) |
| gamma knife technology (D87) | joint distributions synthesis (C46) |