I still find the idea interesting, and I will be quick to pester future quant side co-workers to see what they use for their distribution assumptions.
For now I'll just keep to drawing it free hand, and just this once, in MS paint.
Tuesday, February 8, 2011
Implied Distribution Option Model - Project Stalled
It was fun to try, but I don't think I will be finishing the Implied Distribution Model. There are several practical constraints; the biggest being the lack of liquidity in far out of the money options, and significant breaks in implied volatility when switching from the put smile to the call smile. With huge bid ask spreads and a chunky Z=0 switch, the model lost predictability in both extreme return likelihoods, and expected returns.
I still find the idea interesting, and I will be quick to pester future quant side co-workers to see what they use for their distribution assumptions.
For now I'll just keep to drawing it free hand, and just this once, in MS paint.
I still find the idea interesting, and I will be quick to pester future quant side co-workers to see what they use for their distribution assumptions.
For now I'll just keep to drawing it free hand, and just this once, in MS paint.
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