BFS 2002

Contributed Talk

Summary Statistics of Implied Probability Density Functions

Nikolaos Panigirtzoglou, Damien Lynch

The statistics that summarise the probability distributions implied from option prices can be used to assess market expectations about future uncertainty, asymmetry and the probability of extreme movements in asset prices. This paper considers implied pdfs with a constant horizon of three months for S&P 500, FTSE 100, eurodollar and short-sterling. A time series analysis of the summary statistics provides some stylised facts about the behaviour of different elements of market expectations, their historical distribution and the relationships between them. The distributions of these measures provide information on past revisions to market expectations including the relative likelihood of upward rather than downward revisions and the extent to which these revisions were large. The similarity and relative stability of alternative measures for each element of market expectations is assessed to select a subset of summary statistics that can sufficiently reflect the information contained in the implied pdfs. Relationships between implied pdf summary statistics and movements in underlying assets are considered. Cross asset and cross country comparisons between the summary statistics series are also useful in revealing relations and/or associations between market participantsí expectations about equity price and interest rate movements. Finally the information content of the implied pdfs for future macroeconomic and financial variables is assessed.