Risk-Neutral Densities: A Review

  title={Risk-Neutral Densities: A Review},
  author={Stephen Figlewski},
  journal={Annual Review of Financial Economics},
  • Stephen Figlewski
  • Published 1 November 2018
  • Economics
  • Annual Review of Financial Economics
Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk-neutral density (RND) over the underlying price at expiration. The RND contains investors’ beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With a particular focus on US equity options, I review the historical development of this powerful concept, practical details of… 
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