Journal of Stock & Forex Trading
Open Access
ISSN: 2168-9458
ISSN: 2168-9458
Option market prices have often been regarded as a window on investor sentiment about the future price behaviour of the underlying asset. Such market prices can be different than their corresponding model prices, a phenomenon revealed by implied volatility plots exhibiting “smiles” or “smirks”. Using the unique capabilities of Bayesian-based empirical methods, a four-moment risk-neutral specification is determined that largely eliminates market and model price differences. The risk-neutral density derived for a sample of S&P 500 call option prices during 2008-2009 uncovers significant market under-pricing reinforced by anomalous volatility skews that reveal bearish investor sentiment clearly signalling the pending equity market collapse