o G

o t

F o

R

Sv

e

e

e

y d

r s

h

n s e

I

nF N F

Dt 5 1

P e ii u e

r

s

nna

ca m

t au

p 4

i

b

9

r

u

U A

O A

P PT

O

T P S P I P P D

F R A T P L T G R IC

N I U

D I I C

R S I AR

R I

OC N I F U T

W

R M

a

C i

P T

e

l h

h

l la

no i r

N d P b c

I (

a

nF c t a a w t a ci

Dt O P e ii a p r s m rn n aT c c a e a t s i t au l p t i trE is o n e r c ms i s Rr o i cp e i tu uI f m bn F s e mD t t n l s i r eii i e ir c cs e n nn o a a c o t k w t n r eh rhu c et h a g h ph h a t o t u w mnl c h s e p a i ad o a l uu e i t a t h h r ht o e

A

B

S

T

W d ( p d t d s t w e b o fi t if t a p P r

ag u t f t ox oe

m A

e t i D o

e m

ev e

a

pn

q n rd e r er i f s

tf u

et o a i io e c

e iul m fe

i bf h r ii

v n

r sp m F T s e p e o t o c p ro t Pr p t pe r i s P r f it rG a et d p

o x s At ) r ht

ecp a o s i pe iv o h r ai v ht n e

p e i tp p p io it

r l e eh o t u ur

ua h n W s bo m n h

e i se dir d i o a i

g e t ti e h f s e oi ttta P fe c t b

o o p rg o s

b c gb u o dt u n se t

Ws t ir r t h t c t ui s n i nn o

c i ua cftr e h s i

d o h u di r r r i h v a

h i itu i i is ea t id

o a c c

Using Options Prices to Infer PDF’s for Asset Prices: An Application to Oil Prices During the Gulf Crisis
W R M a C i P T e l h h l la o

I I O t p r d b s d o e a d W f i t i p o i o p t m i w p f t o t t p

n p u p o r t c

t i a u p n T rr a p t ed

r r ano m t d i

o p f s d i ar i di c ob t us t hd e ne a

d t apn o i ht i f

u a ro e r d b t r a h sc n

c ti t o s hl a y

t r oc i r m i

c s caa o

r a tposc e m y l e t e lr e a i be a n iv s r t l ei mu ot i

n s o ar B r a ca ts

m s t

c u r eo o h o o r u oe sb t i ph p o io s m s tho r n t e t rv h hc u hts st

t w s p

o ta a e p os t a t b w p s i s t t as o a p it t e d c u s t i e r o t am

oi t a a p i T a

n H r r s oi t i p

m un n b e i i he i w r t ma nr r

u

g or

rt p t o dit h is t l i se t a o t ts i oo rk r u r t e

a

u co v r te d t dt b m e si t s ia c

p o h iae P p

p a t c rp i s u f i et r A p n r W ea l c be o o

h se i a d bv r uG ta ci c im t t tm o

op m r st d p i

r ii o u t t tv t t bn rb i e eh n m ai ia i

r m h s t wh i h d

a au o o

ic r n

h itm t sa a o

o r mgh m ta n s r o ts pe a r i B

o n i t io b i m l at l m k o ssa m r r sp ta d t o e u r i

p W a f f a at as g

f r oc

h ou e a a dm

w sl a hci

o k a yn e m at s a da e s n c p

v t

m o s

ak i ui h b s ua

h re t cc

“ Correspondence houldbe directedto C. Thomas, Mail Stop#42,FederalReserveBoard,WashingtonDC 20551; Tel: (202)452-3698; s Email: thomasc@frb.gov. heauthorsare staffeconomistsin the Divisionof International inance,Boardof Governorsof the FederalReserve T F System. This paperrepresentsthe viewsof the authorsand shouldnot be interpretedas reflectingthe viewsof the Boardof Governorsof the FederalReserveSystemor othermembersof its staff. Wewouldlike to especiallythankDavidBates,Jon Faust,GregDuffee,ChristianGilles, and Ed Greenfor their extensivecomments. We also thankAlIanBrunner,Neil Ericsson,Jeff Fuhrer,LudgerHentschel,andGeorgeMoore, as well as seminarparticipantsat Vanderbilt’s wenSchoolof Management, hio State University,the AmericanFinanceAssociationwinter O O 1995meetings,the Bankfor International ettlements, he Universityof Neuchatel,the DeutscheBundesbank,he EuropeanMonetaryInstitute, S t t andthe FederalReserveBoardInternationalFinanceDivision. ElizabethVrankovich andDaraAkbarianprovidedvaluableresearchassistance.

‘ Otherstudieswhichfocuson the asset’sterminalpdfincludeBreedenandLitzenberger(1978),Jarrowand Rudd(1982),Shimko(1991), and Malz (1996).

2 R i p t d ( d b u ( ii i ( )ur m “ s p p m f P a p d b p h s (t o t b d i s s W t e o r y r e e do f [ o t lt t t c t n r t t tp no i s ac o t a o pn o ra r ic p a f p a n [ re t i sl t t j t uP a mr u t p t t t x u ai r a G s c o t e u d I u m e s i ui o rs aS c e e o a Ao i e t r c t fn r oc p f i co far e t so p h r (i t e ea f o r a op s o n rd t o p o tv r f r r b e pe S w mF e o m t p a p ir a o

l i c ip h n ac ri

a w o a ob e a fu nl e

u r o e b t a et r o m i l e wi t t o ti ua r me nte a i

eo p s t t t f e tr re

r h u ir eo prp r t

r ec l i c v r a

o- t a s p i pi e sm n u o A m x T o so

ira r o i a

h m mo cm s ci i t n hr ti r i sla e

b p kr a q aco ee a ri d i t p p r

-au tr et t

v ia o

m m r it d e u e w d s~

op ai e e t r h rts

ar a n

tlx p o

or h r i i t- d c i n

s ’o r

i tm r o tu r t r e e rl o s h o as- u pp ao B p s ( st o c
,

p e o t s p r s

h oii t r p t osk t e n s o o t t a a li eiw r b ol t id ur d o o

u t p d l sw

s m a hi

i o t q ot f m s

u a s o l ul ric i fl

i mi u

sa cp )- d s G m ot d

hur t im i

i t o o r mt h f m

pi e9

w u r1ia pi o h ua o i e

u tw a e r o r e ri a e d eo e iw t i di

mc r ir

pr r

is

aoh r b i x hs t s s m nr t Vr b r m r si i i c ho i r t i h t av r ab t v h t l i cb it o n

T hxa s g a c t ds i l t cp a t ch t cfgt s e

e o wb o h

t su s ii i s na

r

s t oo t i u nc atmd e g t

Tx m r t r p t s e e f

p e e nr g i i h d t a pt i d a

c f ar c h d

o th a ic o o ni ih t a

I a r l

ce o i h it i

~Evidencethat the risk-neutraland true parametersare very differentwould includea findingthat the oil futures price did not followa martingaleprocess. Availableevidence(see Dominguez(1989),Kumar(1992),and Deavesand Krinsky(1992))indicatesthat the oil futures price does in fact martingale. This evidenceat least allows for the possibilitythat our recoveredparametersare quite close to the actuarial parameters ‘ I_o knowledge,the onlyattemptto estimatethesedistributionsnon-parametrically our isthat of Alt-Sahaliaand Lo(1995)whichusesintrada} quotes for EuropeanOptions.

3 t s T r a p g g ag a d d d p s p o T A e d w i S S V o Sx fi f Vp r t s p t e iT ri d d o s i a t r o t o af m 1 i p s t e re p S t a c f p b e c w a b q r s i c d b t t f v d ag p t e w r o i o eoi n l d i t t ir o t ru o t t fa l co s Mo e e uf a t a o nt i b u fe t s i fn nd e m d mc f su d t s er i np e ei i n d o hr t tt e p o m es r ts i fo or ro rri i t no s f T aiu m r n i pd r e c l g e ee o t x m s v re ed h h a hr t tc ir r mh s a rxni f A h i a e n n ir t-l o s i er i l

i ib

o is c a xt s o n e u r h i e i Mm w i tp t fe t r m r es s n e s i F s d a o o

m o bi u o h b

f ot a t i

a or a f i e t

d r

q i ol hi ep m d a r

i s i ira m i e o r r m tn w ov a b

c st s i r ri o

ta

t cp

a ia b m

v sa i s c n r b i o i t v l oi r

r s f e m in n h o b e t ei e ph ue n e i r c n se b e m i t c e r sr

o or A v m i tp

ari md b

i

g t g r o r htao tri m e u ut r p e te r h t t ut i t o h ac o h c r tch ii a

m so t t sp t t if P t p s

i ntr h A pt a a Afr a tp i

o bm o p p i th t hf s

e it b o i a t e t e e tp t a

la i h

io t

dp e

i h hht r a t cta t c l

to a m s t G uo t i o c C ar p

r ir t p s nt r f u h

ie l t i ap o i o p ht ai o e f h f p i sp d s t trt ar tl h

ra m h e o

n

u e i w a pt a f p c e u r o o t S

s oa o t h h p a o uc

c so e n c o e m sc cn h s o le rtr ro i e h i o s r r iu i l l nm ec i

c hit r r s ae I o g p d r t t n oin t b

a

a tt u io t i

pr

h elt tu I hr t o

bi d a r

c l b ru c w u o o a r t ep ec Ae s p c i ti

1t t p u i

i o a a b sc a api c t sts

o t up u o cm t pt c t r t ul r h o I a ih e u f i i

4 However,the methodas a whole,ratherthana particularestimate,canbe evaluatedex-postusingEDFtests. See FacklerandKing(1990) and Silvaand Kahl (1993)for examples. 5 Forexample,Rubinstein (1994)beginswithanestimateof theriskneutraldistribution atexpiration,usingBreedenandLitzenberger 1978), ( beforeconstructing,with binomialtrees, one processconsistentwith that distribution.

4

W o o t r d s e m o a t t v d f T h T f a a a l d c n Xd a t l o e v p d F o p A

E i v d ai s e f w

s

o F p ( o a e i c

u t ( s r

r r it dt v b

per i b o tt

t

t pe o

d l a ri s

o te oa ! i it

p s ya t p v au o pe t i p

itt t % h i t o i l tr

e o r

o c at c h

st m t p

b b r i t t t p i eh s u pee t t b t o f ih f d l e e v t

a ba e o

o c r lu p r i s pi t y m e us

a h o t s pe n o cp o . r

r te aao t i

ii t l t h i t rr c

t t t f T xd

w I g x j tc d u i p t t f p l tr ap f an p t pp t i o

ra rt r o

ew i dp e r on rt h p s i aa ct e t m t l hd d a o oc pc rh b e ti b a l o h i o uu to

a c e e nc i e p o t ti h r v a a o mc t

po r n t pe g e t a sp b

wxr d i t t ii

e ab r a h f e t i ifu i a p r r oa g h

ea or i r r a t m a ai t v

o a oi

r i s h r u uu taa e i iop h

p x i f T e ai o b n l t ap a S o f do o l a i t s w

f i t t fm ho n h i i s c s l a o i tut a ex o hr t ohn ea p u a u a m h n

tp x a I t s e

i v h o wi rb t t o a o iw

hs t

re t t ira u uo

k b (

a w tn tp

o o s i g

b

w

pn

uT e u w i b e t h ap u riv g i h h i A

r r i

n o t a e1

o n p

i tet e o a e t a a p n

w re pm t o p odi i

i

oet r u t et e r s n f i pe i

nai t t n r e

ed o tn i o h se x ei o r o ii o n t hf p m

p e p W i t d n t

t b tp r n n

n e t t i o re h ip d e

i o p rx r r i i ~n g h c t i c er

d

b 8e T e

i T xn i ro n T t i ‘ s eu -w s t a

s t d rt h a r

ts o o

e o

t b

o a

e p

i p e ‘x o t ro a

E

d

p e t t e st u

xi e i t p h p *r t p u d sa nm

t , eon e

e a

aT x c

n t o rt p r a ep t d h r

i u rw d r a n

h c m t rse t h

s See Cox and Ross (1976)for a discussionof tie risk-neutralvaluationtechnique. 7Thereare martyboundsin the optionliterature,but to our knowledgethis is the firstset of boundson the priceof Americanoptionsin terms of the risk-neutralterminaldistribution.Perrakisand Ryan(1984)andLevy(1985)deriveboundsfor Europeanoptionsin discretetime in terms of the true distribution. Grundy(1991)derives boundsfor the true distributionfromthe momentsof the risk-neutraldistribution. Lo (1987) derivesboundson Europeanoptionsin terms of the first two momentsof the risk-neutraldistribution.

5 p f ru i t oE o T ub l a l a b b A fs l p iJ c a o l m a hg i o p o ( , [ a h w epe ua n t wi ]

C

=m

i

E

-

e“

l

-x]]]; . ,

E

t

[

m X

c

=m

E 4

-

e*

T -x]]]; .

J

E

,

(

,[

fm

X

P

=m

i

X-

e“

E

.

E

fJ

, (

,

[

,f m

P

=m

i

X-

e“

T E ‘

.

,

E f

(J , [

m,

T r m u t r l a s o T i t i t t e i t i t e o E t

i w a w h e c oa

b

tn e b o t o x t

b

i s t e f o t no rf sp m p s

u a oh ts

f o h ai r p i u F ch

et r

ai

a m c i hl n i

in

h c oconditional on a givenr distributionfor f a p s p t r a u r t u m e e a uaw a sr ae c t s o t xo c o t f b o th t r r p t fr t r p h s a rE t c et e c [t ih u pS t o n a l ve m r u t L ate o , e uu a t

h euv o m i e i i s i hr dt i m q

B pt

o xo f t c r -X . T d m o l p u m l b I w x d d e t i t

p p a t b e f i, e

e d ue t o cx o v

~ p X i at y u h, i p u r c t b n i do oh v e b n da c o w

i t r t hi p

’ r [ i

tai i hd a ul h i o o re c n p r

i t e mh l l

f I ah i r p o s eh T u i h a o u ao eh t o eo i we m

a

a A i t

c m db w f t e l b

tp ie a ao i s t t ct v

i t r ot Et o oi t i Eoi

un r s n

f o d i b p t

t

l tn i e t l i

pi b i

oo

b t

d

f

fo hr

uo p

ii ut

sf

n a sh u ro ih

w

v s o t xo s p T s r u e

c ah e a w e a n t c

s o b ta x f p p e t i a u nd tm

e p he n e

io o i

6 b w s p p e p h e u f c p t ap ao m o v r i t nE c b R E o t r v t o f i t t p d b c r w t ( s e fi i i e D - ( qg n p a s p b a t os a so or vp a vd t t u c c a g p ( S t r t x r b s g t w u t ox u r a oo a c f si b p s c a d t t f d o t o ei T oe oi n h si Th l u a a x sr v t u ps m l pt r p a o or e n h i c i C c o d rb a u r r w i a o b tir t t n a u ho di

t

p m v

o e n th a

i i e r t t t i f e p a u e r i e

fd e i n n r

ht o c a e u n r i r t s in dd tc l e se p

w n n w or i x i c

i tt hl e e h h r ni c e tce o on- n o r a o ec h yr o it

pe to u i stx s h a r d t tx e uv r d oi b r a tl r u o r i ne rn h ieh d tw r e

nd o n i m o nr p n s T o ew

e o d l ss t los s hi t -

f ec c i r p te v e o tt c i o

re l a

th se p p r

a p e t i o h p

n r i e n e e t n

n it h g d b b t es t

dl h i s T e hn ei rm

n a ce s f a oc e s u en v e n tl t h r

e

p p ra r o sp h b a t

e it e a r r

h m

o np w

ee t i o f t

cWo ne a e s o e h i i w n v w h

a hr o v p n a w i p g a i t w o tu oi d a we wp a o m o ic f t c p

h o o ii t u b t th a

u a s c p I t ge i p ni

oh h

s o tr a r uot h

t i r r o n ii c

e u e U n et c p c c h op o tt l e h u iv p l n v n a p i

re v g r t l u h i o i nh a u e ir ii gte

pss

A s u a o u I

o tp u

b n r i es o i oo s rh F r t tp t

d w

I t se r i en r t r u d pd Is u A p a t tt r d p c w n t h o o f

a p w us e c i t elu a t v

mm e e t i e

o hn r

r r p i yt a psm vn e i h I

i p t te E i r i bt

ee rc np a ca u i re

br

a op m t p fi f e ct c r p u ia n t

p ee 1r u i p e o

e4 ii t x

o o pni t r

e h ip sr t or a p i r lc r

r tuO T c re r r n e h e t i i t b f t t o n s ei v iu o

us po t e

o t m dt r

so p h e t

n tu i w i

o r x u cod i l n c a o

i h

g On June 24, 1993,NYMEXbegantradingon its AccessSystemwhichallowstradingbetween5pmand 8am EST. Theseextendedhours mayjusti~ using the continuous-trading upperboundfor data after June 1993. As a practicalmatter, however,for interest rates less than 20 percent. the upper boundsfor continuoustrading and overnightholdingswill differ by less than 0.05 percent.

.&’

7 L f
A

g

;e b ap x op i o P s e a o h nt b r v t s w te o o rx t t t f a p oa r a o i t p ai s a e m c ts w r o t e s o d oa r t e s p e E e n d o Aon qo t dI t bp c w e p t T o e a

d v

a

fi t 8re d e e o pr e t

pr (

sO f

a t p e m t ai e t x

e w

,u et rm

u

i

i

f e r

b tr h

ot h n r t i a n i la t

e 0 r 1 T a

t c d rt

i r w s a ws e i c t tc h s i r h i t u ;e s g $, ). i o hs p p m q ts ihni m u u f n bh c r v n c s r c r w ec dc hf g a m o d n a t mn c e a n a u p un e e .

o t

L

l sp d $ s t s 1

e we r pi e i 1 t n

ap t

e

c e

if tw w i r

r

c b b u t r t c u w t c a t m t p T a d e w d a l t o l c

o o t

s w m

iT g d t i bm ee u se e

s t s i a et e a u t na w u u t su i t l u i d c oh b r

l o u te e b a te pu v b uh ee o va e t h

pt i a t

po

o tp t

a t e rd r rd iv p

r

i i t a

a anx t i f a t n or l x b le i i t h up o tr e o T ee i tl

c o top r e ly qe p r

em k k a us e rl e

m e t t

t u h b a n t p t

l o n ex t b h scei o o ui t

a n u h c ie t e tb tr v

l e u p a u eh r c

b ap s Ge

p h p so t n s c

a n o lp i a ss i go i r o a w w

h ur ns f t u s e ce

e i

e i c s i i I po

he p p t f i

s w c a a t pa i f t

tt e p r rn t s u gt i f ( t

itis T hh b i e f ht u h a el u W i a m h t u nm u r i a

et u p

l it

w c a s t a

i ti el p ao o o tp m t pa <X p t i st s u i

a ,co o o s ho n ow l

ur s ht w h o t enhe ) a e r o

> h tn X T c o n tp h

e re e u . n ur s a h t r ai l p a f e ci t t

i t eu p i ( b w c a f

a h uo e l o t . n r ts h o it e i a el b

uo h r o e r tp

r or

u i

C

=i

C”

+

-

C

t

+ [i

wt

:

([ X

’i

i

c

(

P w i= 1i E [
A

=i i = 2ho

P

+

t

P

t,

+ i f h e

i t e

([’i n r

E i r

[ O w

[ (

i

>Xa

8

T d t i a c 1 I c p p M a t M s w

e pi a

~,w n a a

b t s i t a eb

r s t

or a t

e e r

i e

e

t riw s i ph o t au r r ot s w ot i c b

h t r pt o

s

e o t ai h

n wei

o lw i a y x p p eg u a sc

s o a u i F h mh t bt um m n M w g n ra rp b t i l te m tn

e a o S

p f a a g ic c di a r q l e oo

h rl h i r o t i o b . oe t i

b w e F

tn t i t re F af a e o i e f t

cu a t1

th p c n r h c w t o p t r hs i f s t to i

uo D h f r n i p d rx L d o g uf F f fi = t

1 n i e rt s o n d e e

t o ts t b

i il a r o i h e t l

a o

i a rS e x Np w s n r p t a t oe f m e o t l ir i i tm g 7[ d h or

s pn c sa o tnt i i . f

am p t f r [

ri ( o hx asg ahc r)a i h f c( tc r b l

fs o u N p

i gu rn b

+

‘~3g3[fol

w

h

e

r

k
U e ( a q ( ap s e u c b rw qa f a io6
-rbt

(

ti u t r

o 5

n

i

p ci n a

e

p

(

aP ~l w w

ri = 1

a

ae (t

o

m, (

be

Jve n s i e“ h )

i 2 lt

z e

e

T m c

p t o s i

o ta m o s n n e

e f s

r a oq i

bxe

a o

( ea pu

q ma h em ( o ii a h

d ube u tn ft z r a i i

p hs mt n

ta l o rl i o

o a gr m c t r

g Thismixtureresumptionwas also used by Ritchey(1990)who derivesEuropeanoptionspriceswhenthe pdf is a mixtureof Iognormals.

9
3 x
i

Xi

= 1;

() < Wi <

1,

i = 1, 2.

( h f o a pi a i ia e u d t h rA t c u E n su= c r t o o ~h l e t i se h t l au m s tn t m t i

T a H c a w D t a p r

r d c

o te

s

o t

sm r sb n w p u d b v r i t s le rt e

t tn tm o u

o pr e t tm r

e b id i Vb O tt a w e n

a d od r t u o t I t d p t a

o i S t n p

o t e f ec f as p ab o t n

w c b i r v uf u a rdr n ar ch u inda r m t t r

es i o

i e e h / i i t r ex d e d i m we i l c e u io sp e a r si i a ht t yi t eo h u t

y tao ph t t

s Ih a

f e e s a

p

a a m a w rc fs

u eo t b g i S t e t f tI r e i e l a

eo t f r

to e h

s d ad u r sn i li h m n ic

ss t r s lt t o o c o o

ia o e dc e f v vh f i s et o o a

t ha ab it r C s o

ha iq s a o O og p rh d u ts Te aos wa u e c a r p w ea

c f p o f

s aw h p p F t d T t c d t

lo t e t b a p b

i ag v a o a u e lt

o p t t eo p g g d o t i o f a F a tx r d o a s

ax t t e a r

i h

ir n sh h o n ec l o

t ib r o f b p h l

b e i a l sn t 3 d i t i rf wr a w t d t 0f p o 0 pf u $ t e p

tab a tp

h oe t i ot t h T

e r

p t f te t i m f e u t b t ff l

t de

h t ii

a- l t m uo n u f h

a p b d t s t b b b d

7p O t $ b b iut d $ f t t l e a i

t h b coo s r i t w oo e c e w

b ac er 0h i c o b e nc t 1 tn a ( e su h -2 xa e te wa 0 h e$ n i

d et $

thc d

it a a

o

r tah e e r o . i

b w el f

2 b t e ov tF t e

u r e t a e nn a c

s r uw ea o ah h r r uwp t th p 0t e r p l nt e

b t o l

w ea f fb 0

oo tt o e

h eb F p oo e i

np h re r w

a e o nn . ue r t o oe . t d c c at ) l t s dl h ia ti

c

t b id o p tt o e a u p F u t o p e

b te v c o

xo eh nw a a f h rp . c t r u ao

o b a i bs e

tr e la b p v f h oi l p h c t

( rn s c m o t h w p n r

w 2b o t a

0 o p

1

1 I o a p i t a t e p g ( o p T f p o d w t b t e a A t p f b d S i u q c w o S a p r l t t

S t g u i t f b h a a b d p hd ( t e o a A a s f ad w I A a p e s b p u

M t ae “ irt m p B d u

a B t r o f sc p tc a e ( r s

1 o rm

e a ea ( t o T

o t d

n

n

1 s f i dfor M

c ps u

d d w h u d

h tu

.a

L u e

l ms n i

m r c a p a hg r c ap s t ll

v ao m Bo e

n i i t t ss o i e

dsoc r

p e o d f h fr E1 x o dr ( o

e r p r mh wr t o l l r o a n a i ia r sg r a

u w m

p d b x

i h ru o i i iiir T d p e p 9 p c i rtu i S ae a s

e f l pu

m h hr oo uf o a va u me t i ( m “ r

d e it 7 o t tri vi a a- t se o

t p oe A p a lu l Wp q rn aa r W

lt ws n

p o B ca a rs e bi em p r f 1 t d i xd w m Mr po d r o I t t m et

h x r B h h nb 1 t a mm e o i e n s m n s bil am a s t r a lp a ia u Nu

r 9n

a m f

o cc s W d r t s t rsi o i i i ai

a o mu “ o u r gs t B

o l s t e a ts o o i ego s r o iv i

cn n p t a t s ctr f oi l baf v m r r s

2ue e i t ( p o ts L en r d

a cG or t a o pqe ai i p a mf c e i S pe t Fu r b a f

t ii e h

d

p o t b ih awr u pt t h

B i t a eS p S f a Si e u we u ap t t ee t M e

n o ae o e o t r i y sep a i oc o L

x

e m w te t r o a f u mp t c s ii p a A

w e s od li i gm oh c ho

B e fo q h ar ha t lr ei t f

Sm o

rS i iw rd ii

c s p ri a ie t r hp s w

u w s ib x a eo i nrM

r ctL o p hu i

M r sga o i S r ec c o

t t an nf t i sa gx f p h a n ta L o

ugo b swx r t ll i e eo

am

obi w u o e in

i t a m

e hf a p s

tf e s ct c

hT x rt o

ne ra c

a n w oe er s

d im h t w

p rm at e

10 Overdahland Matthews (1988), when studyinga more tranquil period in the oil market, also recoveredthe parametersof a single Iognormal,that is the parametersfrom the standardBlack-Scholesoption pricingmodel.

1

1 B f h E ( r e a e l p o w s s t d -E m f

D p u f

L

v i t t r e e

t 1D mi i os u i Tcs p t b w[ t i ta a ui e

i

ai

s d

s

t 1 l i e s r ti

t-

a a i t oe m a

r

a t

i h . t

i

t n tc hf no to bt t E t

hm a o d e

a t s i

t

d d T , t

n i o t

ii ai t c

f t

s

olo h oo t a b ie o hi h , b n o r

r r rn u hu r [h u re a r rf e e

o t

s t mg o f a (h ri t

O f - Xee a r

OX-f ] If t X f e t o f

I f > eX rm X “ P w r t n e [l

[ > ]X Eei a w a i,t ] p

tx

oP s p iT

[ <X al a d nup r

I i ,c

o h fv r ] h

a i m a nt ih l rp t m o tw i l

st i tht m o p

d np is ce t r o o c n a r k o n rr r o fu t h i op c rh t c r r

pm i a i u c c o

sbo

pt e o f eo ee s s

cr c bo t o

i p ci o r s

a n ob t h

n o nt o r b n i i u tt i I we k ep om i l h ib g e h l w ts i n iaoh

a xp 2 t i Xa a b i t s X

m r i t p o b t a rt po t f l

et a la t 1 t a ti

n a ub g bl s m h eah s r e

a e 3w t g s r s ot e i i to l

a t h

a i c it t i l

r n n w grb r lh u t f r o o h

n

E

“P t

r [

o f

b o

, l

E

X<

. P

r, f

Xo

~X b

O[ , ~

[

(

<X <

f

i

P

r

o

b (

t

A a d e T r b p

n ri (

o d o F so n d t e s a a u e

ic e 1

ug b to f

s

t

s

t r e

fmr o t

c n

i ne e o - s lia s

b

b x a en u us mt (i o o sh t i r rt sel

p 1o p n i f

t

a 0g x d a u e nr d -

b ) n i ca c w i iw tv b ( c F c ts h i

oi o a s t t qg i i c t l

nw e b r o v u o b erl a e u n t

be i un

ri

t t i sd i d e d h s lr i ts

1 iv s h

l aa 0 b

c e u )th

ie a e t r qi tn e m i s ga o t r ne o

rr s u p

a

te o h g

ii bo ws tl

rah a

i h l h o n

1 $

a

( I t x a

af t t f b

i b t p p pf e t s t

$ s r

n p a h r

af

Ss l d io i d r s ta c iC

oe t

td a .l i b orn

ei w

a t i

ia o s 0 r o a h e o e tl i u l o

n rr t i n r k

o s e i t t d o

ew t h a o b c t t nd

y tk h c i f o w

T e t o s ua of

ii t

bt h wn di t a hs h s ah t t Iv io i n a r lp

ir h ea a o

o mt

t T soi or t t s

iw h n r wb a oo p i

t i o o h

d h eq u a t w e

i rT u i

s u s vl d

i at m i r a s t p yn h t p e

i en u ghx l ah es h a f ee

l

r

i l hf i ( h n

I

A I D 1 D o s t o c o t p a t m a i D s s a e

tr t S p M i e m

O M)

r o

da a r oa f f a rNu 9 s pu m o t l l me i d p m l f u

iV V ap r t t W u tl a p

c

r

h r

ai

t t

k c

f 3

a c 1 h w ( aa qp (

o eo p u T 2 ot m

idu

o

t

tpr

o t t lt u c u ie

i i a eh M h mt d i e r e d ri tn i lm e n ao

J v s r s o f c q

2 1 o t

r9t o s e Y p r l a t r9 c 0

aa e e e h t a T e cu ia r a h s ir i

o e r t d i b a un 6 t 5 t f m to t t p

u o r o t e a t t t c a o r f e v p

g r i er

o b e H s t t o i t J 1 oa o t

d a p e t m tt

r o t u

r i f ntr ta s na i a i ti i e r h i vm u o i o e r l

f r iw l p a p h s ua I t

p r e u c atu p v lm v it ie ah e o ah l t r mu e u t m o tt o

p w su a

r t o t o o a ah o ht

k t o t tp n

p e n sl mo n c r t e l h t v n r riw s t c s a ra n i cn oF a i

U r s n p p nu d r Mu n p t o 1 w t ra

es d r ar ae

t en a o s ii s t c c o

y g e t

w uc r 9 a r r o s9 i i

99 n e e d c p

e

c

p r wr n o e a

c nt v h icnte la

i to oi

11 There were no price limits in the options market. Over the entire sample there were limits on crude oil futures price changesfor all contracts except for the one closest to expiration. In Decemberof 1990the limits on crude oil futures price movementswere widened substantially. 12 are gratetidto NYMEXBoardof DirectorsmemberJim Zamoraof ZAHRTradingand formerNYMEXemployeeBrad Home for We their descriptionsof the settlementprices.

I
1

s c e o t e

we e o c w a

ft x a

t en

dx

st fp

I a t t dx x a n

l ce t s i f c Tr

dd

ew r 1 l c rls e

lf cr wm a a h ei r

e d

iou ei h a ro t ti

ia n

d o

r a l c fau an u t c h as

t uf r h is t i c

t oe

t

l

I
C E R o s T D T n O

T

1 N o p ti aD M I M 42 57 55 48 / 43 51 44 R S o pC M o u

a R Pt C ot n M 1 1 1 2 1 2 1 1 o a p t ( M 93 44 13 / / / 9 0 / 0 / 9 / 4 / / / / a at u o n m t t r i

b

t

O

p om F p r ( I M 37 45 44 42 5 3 50 45 a

r

O N D J F M A

9 9 9 9 9 9 9

7 7 7 7 8 9 8

-8 - 1 - 1 - 1 - 1 1 -2

4 6 8 1 1 / 9 1

/ 1254 / / 2335 0 / 3150 1 /13889 /3866 3588 / / 4827 /

17 15 13 13 / 11 12 1 11

14 22 c 15o /2 15 e /2 16a 2 5e 2 10 a0 3 10 21 p

3 / 3 3 /1 83

/

D c o t s e t s e e c t e

p w o u

f

t

s

T t ft o 6 e d

rb a a

t ft

mr p

aec F iee l src a m n h r

a p e a ii a i i o ts c aa

t

o ohh v lt a c N ( n o u rc c c A5n int n r n 6 r ai t a z e t r e th r at i rl o k

lls sp

t c x n q a ( t

eh l

l p ( t 6 p

u c a t n d n t h e

ni a o

i

o t ohip s o v d a w at a r d e s

a oa t mp h t

tt o r

n4r d c g e a a o o le e La nt

i we p a f aM ia

rE i d r e s o tm p r

y am tr e a

o p f if t e 4 i

ss o t

f a ha S e m e r

‘3One day’sworthof data for the Decembercontractwas also excludeddue to an obviouserror in data entry on the part of NYMEX

I
1
Iv.z

E~ti~~tio~

T o as a w t p m w r l t r s w e e E
.

t t p t P i o u 1o 2 m a to f

h P

G tc e G o ss n c eu h

c r

m e o I c

c o e w

r p

f o ur a t o n o t w rA u

u d i go h m

s r2 iu

m rhi re

s c u

i a ru d 3 ac o I w M b w F o e f t d oe t l

r e ( e( n o t o t o v G

e ed f m K o a C i uf a e p ep d

d r vu t S r t t is h n i e c p t s r it

s ra w a t a p

i mc e t

n( n e a e d p i now c c i tm bi e r s xI a

uo s v l tr i a i c sa m h h tg h o s o

rt t u i r

c u

o t hd g r f c ati

t i bn e d e r i

I o so i rf c k

pr t r c c t dl

f a mi h ae ti ra a o

b

t b d t i ( te

- ta r e b

im h

e

m o

ax e r i a E l m o c i w ee e

t ec s o a x ta

c u o

o o it i i v sr u m g s h t t. p h ot ra t i o t r i ro it a c p a o ng t s a l r ) ht a er t a ii e r

n = n o= O l

a u n x h ti - h m p h A oe r r ni t h o ea

a agg a t h w a oa a S o h ig g m V sg p m e i w 0 B w e p n re t e N f So t p T

ng Ie b t n l P

o a xI n r d ca ui o d w t

mt f o m o m th

!n

o t

a h th ai is w n h e t e p n dr r n r r m A c r u

o o iS u wt p e

s a i f i oc i a G h n s i t

e st b g s n m itL g

d

e t

G vf c l a S

o Ms E O

l L f (

a

F
(j < ~, < @ ,

a

l o a I
*.14

R R g d i al a et r ir S fr t t nn m

4 wo - a s r er i we t

s tR sT l

ir 6 U u B vo e t ee r p t lt s L i t d i on

A 0.0001 < ai <

A aM

f r ba

a aa v i a ah

d a

w e c p T t le e u f g be p

u r

t

vw e t nsc i s a i T t

a h vu u rre qm T l dc os o c t f t ti a

tm Ee i l h m ei a uI t ehh e a t i

( s g p u t o s M v

o t a a

Do e i Co l s G p

m hu p p t

rt s t

d t B

f

s i t ei i d h I lr u l p i p

L i

or

m e a T i t h A pi rt d

l oc

1’ In addition,each (p, o) pair was restrictedsuch that the probabilityof the futuresprice reaching$150per barrelwas less than 5 percent, under each of the Iognormaldistributions. These boundspreventedthe algorithmfrom taking unreasonablefirst steps.

1

t

d G

b t

i

t M d o o

S e

p e f d (p r l

a r tf si i t o a if ( n

a

h pt e e c st pi t p p r Tr o

h ut

d

rc w r a io r v l h b

i e L

e L fi m u l

c ie t n n t mp b fe eh ao e o

iw c lda op e oa mu b t

t ( w m M t

o

p I f a i r d

T

t ho d r p c h ud a ) pt o

s c b a i iih tt o r pr b i i ht e e

t n o f h i u t ei n

p b

a w t vw o p sp l ti

ti o e nti h p n

o e

e t gwt i t o io M

bo rh

t a eo i e t a h

T nb ai t a

d W t nh

pf t e z p l ied L h oe i bi w t a

f a hti r x t r t e p n

tc rr s

th dsh n h c a a tt u u . t r

p

i C

O

V R V T e e t M b a t c p s t b s a m m a t t b i C t d F m c o t f t a m l f S m m t xt m M

e - M o t a so t a f eS m t w g i p i rt t p a d m a t s m a f e f tp d e s

s m if e M sa t a S

u o w t v i s ra h s a a i bch b

l u h ir w m ib a sd

( l a cr f u it T S a cc u f t ei ah o p p s w 0 e pr oa a e

p r c e b vtc ut o a a mh iT m it e a e T cr rd Ph n L t 0 t rc u w t 0 nb r ti wh s c h eb e pnm t h p mh t i ee s e uh a a at p r m h (b i i

r u t ni t e u a use f

ePh t e f a L Ma c l c r .o r u

r tL m n frh a e o w E r rr P e o tu u i t t e e to n tL f fm l e l a h a

o u r eh .u c ss l tt

tg d a v a rn t h be p a N a f i t cp

ar s t iu f ur u Tl t

d e f ew t f d o

u oi n i e r u u r

th M o a e f e l vt u c i r i

m a af t s o f e wti h n t

f i t e oe t h wn o m ch ti h

u

technical reason:

15 boundsand errors plotted in ChartsOne and Two differ slightlyfromthose used by the minimizationroutine for the following The The minimizationroutinebehavessignificantlybetter if the objectivefunctionis differentiableand if analyticderivatives are supplied. The derivedformulaefor the boundsare not differentiablesince they includethe max operator. In estimation,we used a logit weightingschemeto constructa differentiableapproximation the max operatorwhere the weightson the two items in the max moveto to zero and one as the itemsmore fartherapart. The data plottedin the chartswere constructedusingthe actual formulaefor the bounds,rather than the differentiableapproximation,ogetherwith the estimateddistributionand weights. t

1

as t $ A d d s $ z

d u w o $ a n T b e s F od u p t t c p b C t o e w S u > 1 A c w i S ~ e m i T r f x M a w v t 1 u m f t r h t T st e u e o t f o a ti t h c t

bi b

M of

sm s

ae

t cf t f n. t h c m t ep

p

r(L t a mr o

o ut e h n e chur e a $

p wp r o t N l t xt tt o o r s 0i c r

a

i r o

w e rn a o4 f b t i w o a p amS e p

hr$ u c ah0 c

i1 o g l

i2 c w

3 n l s

. w . at l h m ih po uq ot p um e

0 ro t h f a f r e o M

u o0 o a t s i h h u L ai o r n h

e o tt v e m s tu y c u r

t eh b r f o f c ut r i t

t xf M

d

i

id

t n p ot e

c sl ho

t th a wo im e a

m t t P t $ t b p

C

m p eh e t sO t sJ i l a e d e a c a q c

d r e r fi t o J sc I t ot O sa

en st b t a fu t nm c

t n an n a v huet o rO e ae e

bcr t c

o ( hiw o r n b hI o i(

rt n m c t non m c t i flwr h s d t s n m r g L sa o a h e rr e t h wt at L t5l 1 aa l if eo

h t aeu o re t O te s mo n o i

t

r d u i a ci t br i d T p t pf e o r h

h i tb i ta h e i sr a h

S sr c v a t i t s A a t c S c f t

t a

ch m p i

t $ r - a S $ e we b s p t t b i pxm wn p rP 2 [ o > e f xr nM e 1

i t a i og h o ft m r ta nl t r e ei th ii h Ns u g u aa ct i ia a .m l

s t

l h o t so i p

t ihea f h i r o aa ia O] f L

e g ir t r e o . h

t E m o S t l d m e b o a o

e

a a e . [T t b c d

]f , M b s p r v f S s f u s a i a p M S n e a of

i gp d a

h c rt s e

t r t t r r a

hp L w o i v h e tm tn e b a L

bu 2 p b i ei t b

i hg i r a p ph a

h l b e i eN i t M F p a oo s T at b t

nl i l r

o sC h

e t op i o ro t F c5 o F 4 r ui ie

l mr r t t m ra r ob i s o L m mnb m t i

l t

u u a u on g r u ot t c n

tae h s c hd a i rl nh l o s l o t i v nh o

a et e c h t i b e e o Se b .t w or t s p a

os o t o 6 n c e a 6 t c co

oc r o bt T m e w c

h o a Lp t L

n o t o r ot l a n

or o

o S s t sa M e

t r 2e i m

Lm I h p o L5 a

o

t t tl t o e tw k

i y s i w h l ht L t m rr e ihu b s i n a e tam sd s h he rb a

h

osrr m s d a

1

i

o p T

o s d p x f u e p ct t $0

ad m i t i g m o a of M n t o ( i -e a d - a c M $F e r

r i ft h

sp io t df Ti r n io

u r i g i a ea i o in p t eo t

ua a sh a e rw t

c p tpe r h g wr i

t cc -

e b m f $ c i e o t o t o c i

t

a rb S u o

ea r M m p r ct o a d aS f

o t ri he cd L n

s io i h L h uh rm ll o eo

r fA r s -a - i o T c tt T t ( h n l a- r e p Lt e a tt n v a t a o-tr

ea

ch - a m o np S

e

F 0. m i t m o p il f i ee S0

0 .p- a m h u hL . o

o a$ 0 8 h

u er o 0 0 e ci rr 0

t t S u d S n t x pt

o f d

o p p a mh r t c tn rl

p d a L re eio o 0 g a aa

L o t i A bm i o bo tt

ab h

p t vp e o o $ s

n c r r(c n vr o p t u i h. e

-e L p o

ar i dah $ m h e r e e l 3e tb o t

f a o -0 m ta T M 2 E r

m er r t t 0-l a o r m e h b a ui

( I t C ( S M M

P -P

r $ Ar O o t oM e

r c

e

i d h

r t i no

P ( 0 0 0 x

Ca ( 0 0 0 .. .

P (x f < L L0 8 . ..

u x

al f 0 ( .

0 0

V A i m c b t

S t c so t t d

M t C l t S d m m c b i

a t a in

o e tf s w

t fe

o m Ms f

i ah t

~ .

s h ra o a

a t d i

r i r w eh u p h r e it s d s a i o t

f tt S e

f hi aa s h i l M ao

f as g t hT e i Si e t

na e i

ra o e t

b pn i

m n c ah nL n i L

‘ The nestingissue is as follows: We have two competingnon-linearmodelsthat explaina v , Denotethem by MLN:y = g[nl, Xz,n~,v,, Pz,y,, al, o;, al, w1,w2 I Z] and SLN: y = h[~, o 12],‘ / a data matrix containing strikes and interest rates, g[] involves the weighted bounds and h[] involvesthe BAWapproximation II’g[] and hl] did not represent differentfunctionalforms,SLNcouldbe nested withinMLNwith the restrictions(n, = nz = O,or p, = p, = L1,and al = 02= ~~)

1

t a ( r

a T J a P s

cs n t t e

a f W u

h y f t t g

c ac P te

s

m u bi

w s fp oa s no l e t stwo e

a ah l u t s

r o it o ( q ns F h t p r u m i k o n a msd J ao - P t p ug n m s ( 1rw ee 1 t d o r tl r o t tr r m i ne os h o

iae

n o n m hm r o

o a a al ssp i i

w r

c

mo e w h tA f t n s

6 j z ~ jp + .( w r p c T m s T t o f E t M a f a e c S h v( T d d t i s t e d Pt s t i p f e
A

-

+ 1 r~ p i a aa o t t e d evp p ta t e

r l

~ ~

e

s

l ij i c

&

i t p
A

p

e

f

oh 1f t f nf f

r“ o v a

f rs ‘ f

m e

ho oe tr c m M sa

t t

e o m a a l t ~ ra ee t e f t cr b Dr w i t- f o t

mf h t

p a

o m ‘

fi

m p lt ~ i na v z e oh t lr o i c ma o u gh t eo

w o i s n

t t

o p f e st n d e 1 Hd M t ci e s e c a t sv s i ce ( o t a n

q ma u i i

1 a n a ir a s c t ti mt i f h u v a o i eeo t m i t

a. iI h e o mx a sS n b

ff h ti t t p s i f ot a i u l o e r eo a h 1 o om i c2 e i o ut h ea 1 ( l i da r a r ld i h ii reih v i c nl b n jh a

h

o m e r b v

1pi r

nl j d a o sL a n u o

- O a. g t

s a fa e i h t b q bp s ar f a

r af - a,ha T t e c o ti a t p c o p 5 e r f ot l

n o i 1 loc ap e e s t r yh r aw c ho t w uo n

t a

t o iS t a m o d 1 ew o

F t n Mh a m oe ta ti op 5 i a lg

u

t n nt l e

s r hfs r c ifa t

lg x o S iS i

C

u nt l d h e w r et M c Lr p

lei i t i f rr v u e f f f ni ni t L L oT h l a e r h L

a

av M a

b

tc dla e b r

e Ln j a

t

17 MacKinnon(1992)for a discussionof these tests. See

1

T PT t

3 s

a t e a t

S C O N D J F M A o t 1c o 1 e 1 a 1 e 1 2 2

a M D 5 1 1 2 2 2a 3p b v c n

1 Pt 30 70 30 n 20 60 10 60 r e e tt 0 0

M oa M o s D 5 3 1 2m3 1 0m9 u 2 2 5 2 4u 5 r r 2 9 2 3 0 0 r

1 Pv 0b 0 0 0a 0 0 0

L a .0 . b . b .0 . 1a .1 .0 t 9. . . . . c. i.

d -

o

. .

M M o c t e M d t p w h t ( 2h a l

( n a M a o i r i n aw t

an

t o p

t o

Pt c

c 1

h

p

Kf o i rt l ep

s

9 p ih

e e r i

n wa at

9 so h bo e me t m r c

n

an p

u Fa e a

x d sa m a w i r m i ac b t a r t t pe r( de e i s ia a t a t h ra l ( p i tp a Pt i

ot

2e r t r3 o

m a f nc l p o t t f G

t vo m o o a x t am ls i f h M b rp r

c ei i t g h t s o ce a ei t i h ai e vav

1 p a t tu q R r 9 i t t r d

h n t r Te

i aet o g t u

n

c n w r ~ a

G s hN a h o o mK h 2 w e

u a e deo h l si g a o e eo v a 9 n m z

h o Grw r

t cd 1

r hn a rs 2 i

(

f d

o

e b c

a ap v c p r w

i ~ ii s o

a s

n o t t h od lu o t e e d r v ia

~ u ip o1 Ts m teo t m w

i ea l

a n s to

w en

i M ra 1 i c m i

i n o lo

v p aa

2

h

e

t

e

f

x M

1

T

r 4p p e

t

F o

frr yr = la O

h -

e

l

a do

ts b

o

T G F

4 -

a T N

S ; Fo

a M D (

1 nP F t

M -

aoM D t

1 Pr v

L a e

d o

n(

,n

) l ) a ‘ d ~

9 1o 2 e 2 2 e 4 4

c

1 1 1 n1 1 1 1

1 2 2 3 3 3 a 4 p b ~ c

0 t 0 9 07 06 09 02 06

4 0 0 0 u 0 0 2 0 r e e

o 2 1 2 2 2 2 2 3 2 3 2 3r 7 5 4 7 8

00 00 m m 80 60 60 u 30 50 a

. . b . . . . . .

1 . 1b .. b 1 .. 1 .. 1 .. a 1 .. c 1 .. i

2 4r 2

T

c V T S

i t os E t m t a t M a er o h P

a t e G pn P hn t m

o t n

P

S c i r v l

w l a hM e o r e e c x t t p i s a l a ur r

eh n u i i . e

ht c

js h n ah uci i e e

h

ei me t

c r ra

t a t

e m o o e r m e

l xu p i g mh p fs a l ip ohow v i h bm a D o a i a r h d h L

os er

a h o i c pt s

“ c o “ b

h t C

ce n tn k t h t mir r m

fs m t i t m l i t

d i h s a

u t i a S e

t nnn e o

f t w

wt e n

f d ur io L e

o r h ie g e

s r p

e

Model 1 in equation(14), the derivativesof MLNwere evaluatedat o, = C2= a, = .2, WI = W2 = .5, X2 = .8. Giventhat the futures price f ag t d w pl , pl = 1.05 . V2 , Xl = ~3 = j, ~d not used in the estimationof the parametersfor either MLNor SLN.these derivatives,givenSLN is correct,will not be correlatedwith the errors from SLN When MLN is treated as Model 1 in equation(14), the derivativesof SLNwere e~aluatedat the estimatedvaluesof p and a from SLN “l’his a conservativeapproachthat increasesthe likelihoodof a significantF-statistic. is
as
p2 = In(f) G: ~z . p, = .95

‘sV’henSLN is treated

r

2

O T a K n S 2 o t p T 1 i s T 1 f f t t r f s P s t d S t a a c i p p t t w f m m e o t e O e w m r b l 1 s o w e

O

2h1

t 1p t a p

Lc

F u ql

T a as u s w re v C i S i a tp q c u r t cr i dw sn a a

rti or w K o

t

9 I

ne f

o h i n5 s

a

ph d o r b i i i

tt 3 x o K Tu r ( e x 2 ( f x e p f m $ oa c g vc c e E a s t ( t f

o wu e o p pa b e 2 ( w c eu si o

eu c e

0s w a 0 h u l n oi l e h l s i a e o ia u tl .

uw h t n f r h a c e l c p ra 3t r t tLb J o ea2 t t$ P

r D $ p ac O

e f as Mhe ra e m O Oa s n o o b

be

o c ta n p

o e no tg a ni i 7s i bi l

a pp i di $

b nk i T o ru t i ae u n e f i 6 ln i1 h

M g h td a a b

n f e a rs i i l iw r oh T g a Y c -J i ee o r n 9 d

pe b b i N a9c v n h e c wo e f t

t a eo r

e e ir nda h ii

a o pn i ao e t $ r ta e c br s

h rh rvo e nho t l a s t p

e sci

o n f ort o a ts n f t

e m dum r l lt or p a rh e r o a

a n2 i b f t M

c a oh O ut n o 9 A i

o che e th t f r $ s a rw h a Jeug p l s i ei re

r .p c l t

i

o C f c i p

o e h v i P n o hx d r t o i i t i tf hd n i i( t p ii aI a 4 Ou J i f i n t h Me tt i t p t7 m i

h rDu e a ana a xo i lr

o aam p c ra

go m t t $ d w

d a fps o S r

Ai r r e aj r c i u o n a i

l p o b r hr tm P hgn a Lb e p

1 a it tu0 P a ms ic P f e t a or rC c o

a h r -c e n n s t u ane rl o

o e ag 2 d t

a en cc a n

hl

B J a ep

l a hd r

mu a o t3 e Nt f a 2 i o rn m

a eD a b ia i

r lt ( i

s 6 u c t mt w -t

V

C T p fi c ti b r o t d

o am sp sb a l i d

n fe u o T tm f et w o iu o a

c p h g e t i v ia p o di

l t e m i t b c

u m ps e pr p t i bs e t

s a r n i t l ntc t l t od h rs r

i o oi i rh i r i

d d o am

i qr m awr c

o l ulo u ua l

i b l rp s T nt

t it aa n t eu n b

h x wg d h s

r i t o or i o r ms

ui

I
2

d p p a t r u I i c t m

t m o t

P s t s T

G

c

u

A e t

f s i a o p r

i o r

o tr r p r p n l it g wp g h r a

u

d o h i r u mo r i o ai h

s o t oc i ia ct co c c

n s s

b ih o c n l t ce e

ai

i pr i t o t l p o s t t t i s r mb am nsi a (i l l o t o ps a gs “ c o m i t mt p i a

v om th vh o e n ec n i c

i t

s v

l em a priori i p u i

i a ec t e

ha c a

ro Oo hmhh st a i t1 e r am ns st a s r

a s e r ci b u a t s u s c o nh c m pr x tt d x r io c d t ebr k d i re t b h u ai e e il sh g

eh ik h u as e t o i rut e l nt b e e a i ab

we w t d b u a I t a a o t W f p I m a o n o t F e w s c h d b r a t t on2 i o t s

e o s p ed p sr m i o pw f r o s o ic ca g j 0 a w o sc t vd e t pn i

m aai eit F e e s t r

o i tio f t Pm a s w

i . m uu oa m b x

” O si t r h m pe h tl a sr m o ie

b u g t a i oh e e b t m ie n i i t

.k s h o a p i p ie

a e o sn s c p h c of rh m h a g n k wr i o a tr h d h omn i t l o i d h et i m t $ t iri m o r pt a i a m m a io o a i aih ib s k

t p t t a t re 5 w o i mo t v i d

m o p $ s t i u

c

iot oahm i o m hc n nh o u t r- n

cr d

ni

w

i a s in ig m c rv t r

a ai

n o e a a fs W l o mo d r t d sp i m t s r t n e m

6s to ta m

d s pa a

d at

o i m I p m o p iox p e a e o s

pf c

aa d l t o w m io f r e olsrr m a s s

I ct e e ot e

cp lg a em a es s

p r o ts p a ad rm

er i t l r o sa m t hn s um o

hu r i i n la ae f -a

ua m i xa fa h a t ir r e lpc r

ca t i ec c

d a cn a r n g r i c

o

c i

ei i

‘q Deutsche

Bundesbank

(1995) provides examples

using related techniques.

2

R

e

f

e

r

A F B J B

Y a i A a G a o F C

A Wl L Pi R W r

“ N “ o

-

N

E S o P sS

o S sa n a 5 oi e n 0 F 0 To F i a m C h r a a n L p n7 9 tz P e Ca e I (

D pt h t e n B p 9a r1 O 8 pv

I. a a e i r o n ai ac r s 1 c

m lt r e o nn - 8 l e

an m 3k

i i9

W nr

An h A E 3 i 1 u

nf o- Aa p

A a nrV m li fO . d

a xe pc

4 o ( o ’a 1i o C l “l c6 i “ 5 o( “ i e “ V 3( c P 9n o I R P W 1

D S “ F

I E n0 C r o

T r ExT t 9J

M e 9 9

a J e pi o a a h ” nu 1 rnuo oh l oc b

c rso d c 0 1 a 1i op m6 ka d 6 ki 6 o rr p

4 ( P M S 8 ( D a R L r o B S A R E I K J B

B B

F “ F a E

J o a

Eo T o

im t 3 cc c ( .Jo n ii c o Pt r a

co O 1 o3 e ot S u 6 o O o 1 n r a aE

o- 7 t i i dO n n. r e r9 1 . P n n5 9o v e f 9r P sr op 9 Cn f n O F . r Do n s7 tv r b i u tt Pbm l n s ” J tx r ” e e p C i - n7 eo a c m ma” Ts ei i n 9 oc m ob 1 - 7 e

B J C

s1 u

2

J C a o F

a f oA o r 1 1 4 a n

lS l T p

o r oic ii u c r in

D

R a E

ii t R f M u 3 f t e

1 ( e “u M u

a a ev t a n 9e

D B D C ( F

n un C 4 n( a Eo m o

d o D

fo eM T o n e fCa

h

1 d N1 e oiC f l O F T n

h-a

K “ o W 4 P L a C

V P R

”qI Oor a i ut

M u c nn i Si r a it 5 oe 89

t h i lt e r tt nk n r

T 1

o

F 8 c o O C a Jm

M

hr i H i p 9 a pi P k

I a i n r nE a l A r t 8 l .i n s A ii o

Ra P K M o Ra P r 1 A R E F a “ i a

“ A T t 0 U O

b o sg b n e c

r n

r e

om A y

r Ss

m o E g

e k 7r o(c

r d 1 u ie 7 o rt P . n e o sF t e e( b h r ce o

t in i9 u r F g

G G ( J

1S a r B D “ 1

I

o I d

n a a P . h z tA e p D d s ” Ji n i 5 9 A pa p r S 1 a 4 n ” Ic 9 c ur P S u

y Ma 1

u Ar n R 9J 4 rV 3n p u f o

d s 4 nr o h c i i r t l t 1 l0

R a o F

AO 1 (c

r .r n l P n 9o 7

t d ”o t r u x o J b o c m - 8

o ii w o ii

K

M “ 1

u o A 9

o C r O F c

mTeP

r a 3 u( a 2

t s a h i tr ur t

2

L

A W “ F E a

S i L

U e 1 (c B 4 o ( S 1 tR P c

B m 3n eo P U i1 pT t 1 a Y e a

f

Oi o

P 1 O o o u1 1 n

a o E o p p a7 n V p Sv 9 R ci r

p P a n 93 o

r Jx r

u aa o c m

p

t p o iy o m e - 8 ii

L

H “ J

a

C

w D p t u n a A pao o ra 9 e iJo n e aa 2 7 to gf E 9 tf vxuo a e a r c D t n rio i n n8 -

y p tu nnc m

o F J G “ a

M L M

aK A M e e M 09 oic Fo M P l C Pe i i Ua o N r ( d Rh

d c eco s f ur ciz

3 i (

r E s ol b R s t

2

A M “ F R

D r e

r P he b

a r t ri p r m rn h e c rd

B C P eT F P nF

oe N “ D

a o1 e i Mi e e r n an 1 o P W cn

9re o aoi o v

m

M

W R a C S O I

v s

t ur G y Dt e “ 1o n rP B 9 f t D

r”B u o G t N 4r s ( Ot 1 3u T M il c i 5 4 no ( e l B p t i l a e Ca o s J s

uo t i iF u r u o i o R a cO t p t au h r -n8 k 5 i t o hFs a ou 9 n e to sR u 1 n l e 7 x o R

9 c i h t

s r se r

O T P 5 R

J A av H L M E S a J Pe J R 9( “ 1 O i 1 M u“ D C “ O S P C 2 B b hI M o( K H Ki A J V V

t dF e a Jo pi

t C . TY O P pna o 9 5r h i . o nF

Oi Dy r r

3 ( i a os t u i i c 2 ai e c i tr oe 0 2 t m e ari ir a 91

R J “ 1 (

a pN C 89

W T I B i J i

R S

o F mn r D r i ia

i p 7

P im o o Fe 1 Nu l oR S sM o

i am p H a o Ei t9 O ol u s f c

yb I t t k lb

o m ib e a et e i oo a b i

D rp a “ so F

auU c m v pP .vi n 1 t 6 m r h o

i onre n s o 9e r t yr a h r e

S

E M S a .

e1 ( u

s7 a

9 5u n k

2

A
D o e b

I
r o i v u

T a u a e t p C =E m p

O b i g

I t f a f t

ah c

~,u o C s v p =m o E

a An s e i ot p i – ps r x pr u rc nE m o t

o n t

d am o i m a dt a p f (r t

st e

a ip d h e

r rt r r px o a ~ o t i ir h i

e e lt t e r i n t oe n r

efu t i e

oi h s u l a

4

e + E sl ip p i t r enp a a

w i J l v f ~ et t r t rfca

f hm t e X i n no o i p em r o

o t xo t t e f i

Xi t po bi eI t w t n i t ~i t

r h oi i s bi t

t it a d E d h t ie e e e o r ap a t t it n t l i u

r t e /twm x k o ai sb r a if

x e n ir na o p o ] o

hv d X S ,u

ia a u i

m ~c h

t P r r ‘

A D e t

p

o t r

i m a f L rJi = { pl t o e t p o

P z ...z or c

=em o p 4X } bsa i c w b t ro v o

, e* r E h l s o po c

t EX -

u. i

~ l Teo

t i c

fo m 5 ~

i ~ T i o m r[ t u

n n , e f. t h n i l e an i

e Oa T m

p s j -a ( i2 e ( > ~

Eh t e n i o J i t n d i ee ~ h ~ O / ’ f h ,- o cS ~ O b y

ap e a w > T p i b i , i

e r h p aD

d - ~s ~ i & e a 1

i x

L C S C h d b e > em 1 e D ,

nC m S

- m 4E d r T s u t p (

e‘

E u

t

e [ xa , ,

m

s i

C =C

s C o ~ ( c

l~ lC h t T l ~t

~

hw i

w ,

C < Cn Vt > 1 W i t b ‘ i p =E

ep n o t

o

T e ei

ox

e

r di p p i b s t

x f O t ip p a

t

e m o ri e o fx y iy v

p

p

t e

L r x - f - X rB a y e m , - m q( c o [ y e S a uE i . rt m

i a t p ~ s i mr i c [a m a, ep

i u iX o

y, =Et[y,+] Et[‘o] i S w hn O

J (f
( l[

E T v

o a A

a n t m ae =m rx

x h al r ((

e

t e a

=m
I v o p p t e i a e

O f -

l

n

p

i

i

u

i

-

1

2 -X, e ‘b’o = ma y, , 4flE,[fO]-X, eE,[ ~]El[max[4O, fO-e ~~’”E= ma +
‘&I “

=m

= c 1“ l aT

,

(

[

m

x]]]

w

C e T

S

Oo t s p

h t a ef r

m ( s C c e7 E

p ~ ( C o t V >

t s C

ni

e , s l ( + , ~

c

e t m aC it o ( 1

e n o [

; W w r

v h r w ha A o la r it + ~

o

c

b w

i u a,

v

ct =m i y
B a C < C s t s

C =m 6

u

m

,

h p

t (

i

o”

C

<m x y
s

e‘

“%

tt [

a

c

+

S

fu C

b

t

ti

t

o

u

t

i

C,+, < ma ytd, e ’511 maxyt, e *51W . Et+, . , S m z y r y w e m i )c O r p( t R t n l

xl

[[
e

.
i (

(
Y ,

aa

n ( m

y

c H

ah

C,+l s ma y,+, e 761*1. Et+l S ym w c a r ri y w E t

4

[[
rnax

m(yt), e ‘6’. E, i t nn p

. [ gi [

( c l y

a al ( m

C,q s m S E > m , r

yt~,, e ‘ib(’ E,q ma m(E,[yO]), e ‘6’. E, . 4 [ i ( m[ e w E (m p c

. [

( c y a[ O nc m

o n t, rE ( t i R

[ , y i a t (

S w

e‘ c

< 1 e ‘ oE i v i h

s E i

,

a

e 7 oE
t aa

[

c

bn r, m a f nh l

t 5[ i ( e t g o

m

c m yn u i

m u

(

B i

e

tx h w C m E 4 t N E t t

p < m pm n r t p

e

e

c r

at ,+ a lh i . , s mr b r hi p , fa u

a 6

a , , ( Al w ei on

t t a

y e * “E =t [ . e ~ “E ~ O f ~ + = c h t s E i td p a t r

[ x h iu

X[ [

T

c C

S

To a T o

et

o d h n [ ([

O f - ,

X h k 1 i e tX /w r o

F i t u

t i ( n b

t

c i s

i w

a i f hh e s f a

t h s t r tr i X .> E a [ ( hs i ( [ l - i~ J a t

e There is a it ~.t. Vbt < St , 1 eu E A q t ‘3’. a C p = e ‘6’”E t n i l & =E o r O f r f

c

b w

a, 8 < S yd t , s r i ap i O f c h h em e i t

m

T

t

l

a t

i

a b

e k at z t g O f -

e e i #x

C

w

i t I (

u h E

nE w u p t p Ho t t b i i p a ah e A =E

hv d t

o t uo i q o 1

o o . a h l X i h

t l

u cp l 1 mf [

u

O f - , > e ’ , -E h e eg t t t t il d a dr oi o 1 lrl g u w tt pt c p n o E y - X e bi ow e

[ [

t u

w

a T N

l p A ( f

t

a iqv d a r u h b h m t

p v sa r c u u it Ma o n 9 h h x ot e i p cee n ar e i e

h b -n f e o y o t t n rr s r t nmv ii e r

ri b oeden 9 v

a g

T i S

e i

2

Appendix II

E
I M o

D
. d e

E b d

( i A

a

q (

i t oI eT

t

g u t ap r

p h

e

a

f

p r qa t c e i i5 t c i h p e no e

nu oi 6t i

h r

h a o a uc dv

r fu p e r t

e n ve a n

d

C =W C
P =w PU

+

-

C

+

,

W

E ’(

i [

c

(

+

-

P

t

+ [

t Wi

e

( X’ [

i

p

( [

S E d O
z

fu t
=

b

bu

e

s >O y t

(

o a q t p r

n em i ( ,@ f

ts i

l u

u t

o o ha u ) O ta tr u u i e] t r f f ( if

i

t n t

h t -i a e ix e c o f [ \ O” f

E z Iz z O [ P s C ( =I sm m

w i rq t r i b ,& . i P , [] + ~

i

i 5 O a O

i

E , e

, e‘ (

] + [[ F

E

r C l

p

=w
( -

m m

4
4

XX

e~ ( e ‘ ( w-

l E E

f ,

i E[

1
1

O+ E , < +~ i f O ,

( l

sX f

] [ , OP, [ S

)

I i a

t

t

d

s

fi f g =

p s

s(

i a tu m h n ‘~3g3[fol

o I r ru [ e l

i it i o h g(

m ig o x u bf a u f r ,

n

+

w

h

2

U o i e

t

p p(

o t rI a q ( e m

s d

o o

it

t

p i sg

t ee h n n i t b2 at o 2s

r xr e

h vi o p nt i t l. a

tn b

b usA
3

f r ua a f A

o

E

=~
i=l

Z -e

p +— 2 [1

CT;

[

(

f

P

=~
i=l

l ‘ “ 1a ‘ r
[

I 11
[
I
1

n( f

O

4

(
L

r

3

e n 1“

E l

=

z

II
2 =E

1

r

0 + P

1 — 2 r

2 ( [

x

i=l

f

E

l

-E

l

f

[[

f

( O

[

A O

w w

@r i t

t o t

ce pr

n h

up d

f ir m

o T s ee u p u

. .

e t n

ls a h rnr r qc t d

ae ri e fe h

t u

o t a m e i Af r d

i pt i a o 3

br t mi f h nr f G

me t.

z(~he~em ~f~e Iognomaldistributionis~xp[u+&/2}.Calculationof (A2.9)~d (A2.10)used i (1980).

n ~d Ryzhik r

ia

. 3

d m m o

i

of t ii g w a l

m fo e n p a l

ei e w ia r

r n

p( e d m

a q

( n a e pi n eh

eC t

u Ai

n A arh aa n o b

o

i2 ast 2

l i v

n

T r ah a w rai z r a h i o t a lx s m(

to l t n e et v i a x t lt i m

o p ae f o -

p g g 1

i

rr o a i +

1

( ‘

e

y

x

m

s I

a o .x +

- g

x I

i oy o

t [ g

( m i

x at

A

S

M

I

o

L

d

T e t B t a

S o

M p

u xi t p f t

t

a o t pp p

p o Bo p p o r as a c o o eI

aa r W s t rr ( mi rw xh A a

rh o L ( do x t ( ah o c i Ia o i i ep n i rg e

h ni 1 h m h

m e o n ns tt i

o a Ar

m o h a i ar r

C

=c

[ +A

E

E , ~

,2

w[

E[ f

t

( [ O,f

]

A [ [ *, h

C

=E

- X

w

E

,

q

~

( [

h[

w c

h [ s E Ee - . q X e‘ @ 1 ) [

e [ t -[ d f d , [ l O E [ []

r E , , [

A *

s &

- ‘ d

*

3

1 % =

J
1 -

8 e [ x r p ~

c ( 2

In d l

E

[[ x

+ — E @ ,

, [ f

C O

[

]

d

2

=d

[

l E% -

[,

[E

f ,

O

[

]

E

=e

II
p + ie s r rf e i t tr 5 o

0

,

[

T

t

f i t

c

c p

oa

r f mi *

hi a .f *

m m o t hi , [ *

t c

o p r a ,

i c l c l

f

- x =C

+

( - ‘ .@ [ q

f

(

d a

T C t t a

f w N ( 1

f u m

t

p t s

o oa p f0 ~ i a

i s T i En l

t t t G

ci

s

B h

f d m

o N m h

i ah a

e u u io

i l r er a U m J r

sm p sa o

~ ,d fh

a t A w e lp p

o 0g m p 4o e d i ,( o o (

A o ( i4 p r z ( i u e a f o e ns g Aa A ~ (

or e

iq iA t

i n

d C

i

t =l

l f o

o fA g. (

ap r w n e t E

i2 tb ) ho rc i [ Rf 2 R 2 * l

+ m o

(

1-

f , .l( 4“ 1)

,g

3

C

1

h

W

o B
U B

o O
-L

P
o p o w e p

C
*
0.8 - Paunt of Optionprice AbsoluteDiffcmce +

0.7

).07

0.6

0.s

I
I I I
1

I1

‘,
\ \
\

MM

\

2.05

\

\

\

\

MM

\

\

\

0.3

/

\

\

0.03

\

\

\
0.02

0.2

0.1

0.01

0.(

15

20

25

30

35

0.00

S

t

r

P +
- 0.8 Pmcnt of OptionPrice AbsoluteDifference *

0.7

~€ÿÿÿà 0.07

0.6

. 0.06

0.5 / 0.4 / / / / / / /

, 0.05

~c .04 0

0.3 / / /

/

/

.0.03

0.2 / / 0

/

/

.0.02

0.1 --0.0 15 20 -“ 0 / 25

/

0

/

.0.01

30

35

0.00 40

S

t

r

3

I I I . . - . - . . -- . - . . . ---------------------, ,= ------

-

-.--.--..---

-------------------

0

.

00 0

10

vi 0

N

0

0

0

8

C R e I
0.09,
0.08 0.07 O.c% 0.05 0.04 0.03 0.02 0.01

h p f F a rS m De e eu p s i n e s n l

R D
— --

a n c

t u

Mixamofbgnomafa

Single ognonnal L

\ / / / f

\

\ \ .

/
0.00 0 10

23

30

40

50

60

70

80

9

F C
s 0.15 0.10
A
A

P P

( E
-....

d u

o r

l r r

t l a i

a

nu r

ij

htixtureof Lognormals SingleLognomIal
A

UpperBound Lowr Ihml

A .

005 0.00 -0.05 -0.10 -0,15 -0.20 -025
20

s ‘.- -m=-. ~.~ .. : - * - ~- ~-= 7 “m .. 8 t . --------- ..... s ------------------- -.A ..-.
--’ --.

- A-

-

~-

.a~ --

* ~,~

6

A A A AA AA 25 30 35

S P P
s 0.15, 0.10
0.05 0.00 -0.05 A

t E
----UpperBound ~>u,~ ~,lunfj

r r i r

r
A

u c

Mixtureof Lognormals SingleLognonnal

A A A
* –h- .+-–:
...,. - ~ -

AA

A

A
q

A A

E- g

* .

:

: . ... . . .. . . . - . . .. .. . s - - ... .
A

.

-0.10
-0.15 A -0.20 I 15 20 25 30 35

S

t

r

I
3

“ &
+ + **

5!

I

3

c

h F C
b

a n n c n

I J 1

D O
M

e c

u o

t

Srngkbgncmmi

0.18 0.16 0.14 0.12 0.10 0.08 0.06

h\

0.04 0.02 0.00

30

40

50

60

70

F

P 1 —
M S

( J
L

d u C

o a

l r o

t l n

a n

ru

O
0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04

/ ~

0.02

0.00 ‘ o

3

4

s

6

7

F

P

(

d u

o

l r

t l

a

ru

R

‘i

C

hg A C o E

h a

h I r o t F x
R ”

a 1~ F p p

c) n u

ut -

e c l

H n

t e

by

Pc


70 –

~ S

~

-

F

65

60

55

so

\
45

%
,.

\ / 1’; \. u
\

40

35

,
,“ ;

30

. . -

.

$.

-

,’. ,. . . . .

. ..’

., ,“
;. , *.,

.

..-, .

~ ~I
b

\ # - - ‘, ,., .. ,

“.

,

.,

. ,, , . . ... ..

‘, ,

,. ...

*

*

..

.’.

2s

, ,. , ,-- .,*. - . .., . -,\ ,, . ,,
1 1

‘u
q 1991

I
D

1.

A 1

N

Jan

Feb

T

r

P
0.35

t

P

W E

- M

t

F

P

r

of Lognormals SiogleLognonnal

0.30

I

0.20

II 0.15

, k
I

1=

\l

,1

I I

0.10

0.05

A
1990

1

I

I

N

1

I
D

1.

Jan

u

Feb

\ ‘k
1991

M

c

h

a

o W O

I 2 J — M
S I

D C

F

I

0.07 ,

0.06 t

0.05

0.04 \ 0.03

0.02

I I I 4 / / / I

~ 0

30

40

50

60

70

F

P

(

d u

o

l r

t l

a

ru

O

2 J — M
--

C
of bgnonnak

SingleLognonmal

0.07

0.04

0.05

O.w

/
I 0.03

/

/

/

\

\

0.02

0.01

0.00 ~ 20

30

40

50

60

70

ID

F

P

(

d u

o

l r

t l

a

ru

3

C M J

8 L 0 0 0 0 O 0 0 0 0 0 0

h

S

o L 1

o A W
(

i )S o a

I

D

( g x A - o n [ J

F

i C 1

n

g t u

o a

o n p n . . . . . . . . . . .

0.10

, , , , , , / \ I ‘ I ‘ I I I I I 1 1 I 2
-

0.07 0.06 0.05 0.04 0.03 0.02 0.01 0.00

0

4
(dollarqbaml)

d

80

Futuresprice (doUam/barrel)

J 0 ~
0.09
0.08 0.07 0.06 0.05 0.04 0.03 0.02

1

a “ 0 ~
,
0.08 0.07 0.06 0.05 , O.M 0.03 , 0.02 I / I J I I 1 I / .

n

J

2

u

a 1

\ \ \ \

I 0
FuturesPrice (dollarskmrel)

m

4
FuturesRiu (dollm+mei)

6

80

J
0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0.00
I I I 1 / I I

1

a

n

u

0.08

r\

0.07 , 0.06 . 0.05 ~d 0.04 . 0.03 . 0.02 0.01 I I I I I L I I

I I I m
40 FuturEs Prim ( 60 80

0.00 -0

20

40

60

80 d

F

(