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NYU Stern – Federal Reserve

Conference on
Extracting and Understanding the
Risk Neutral Probability Density from Options Prices

September 20, 2013
NYU Stern School of Business

Investors are used to the idea of extracting implied volatilities from the market prices of options, and much effort is devoted to distilling information from the resulting volatility smile. But implied volatility is just one statistic, and a major problem is that it depends on the option pricing model that is used to extract it. Recently, attention has been turning toward a more comprehensive concept, the risk neutral density (RND), which is a full probability distribution over the stock price at option expiration. The RND is also obtained from option prices, but in this case without any need to specify a particular pricing model. This conference will bring together researchers from NYU Stern and the Federal Reserve Banks of New York and Minneapolis to describe the work they have been doing on extracting the RND from options prices and analyzing the information it contains.

We are particularly pleased that the program includes new research on this issue by Breeden and Litzenberger, whose 1978 paper launched this line of research, and by Steve Ross, whose recent work on the Recovery Theorem is widely regarded as a major step forward. Discussants from industry will also share their perspectives on this promising area of research.
Sponsored by the NYU Stern NASDAQ OMX Derivatives Research Project
Organized in conjunction with the Federal Reserve Bank of Minneapolis and the Federal Reserve Bank of New York

NYU Stern School of Business
44 West 4th Street
Room KMC-170
New York, NY 10012

Registration: Attendance is by invitation only. Please RSVP to

10:30 Registration
11:00 Welcome
Stephen Figlewski, NYU Stern School of Business [Video]
11:05 Risk Neutral Densities, a Researcher's Perspective
Allan Malz, Federal Reserve Bank of New York [Presentation] [Video]
Ken Heinecke, Federal Reserve Bank of Minneapolis [Presentation] [Video][
Stephen Figlewski, NYU Stern School of Business [Presentation] [Video]
Academic Discussant: Robert Litzenberger [Presentation] [Video]
Professor Emeritus, Wharton and IAFE Financial Engineer of the Year 2012
Keynote Address
Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis [Presentation] [Video]
2:30 New Research from the Old Masters
Douglas Breeden, William W. Priest Professor of Finance, Fuqua School of Business, Duke University, and Robert Litzenberger: "Central Bank Policy Impacts on the Distribution of Future Interest Rates" [Presentation] [Video]

Stephen A. Ross, Franco Modigliani Professor of Financial Economics, M.I.T. Sloan School of Management: "The Recovery Theorem" [Presentation] [Video]
4:00 Refreshment Break
Risk Neutral Densities, the View from the Street
Panelists: [Video]
Bruno Dupire, Head of Quantitative Research, Bloomberg LP [Presentation]
Alireza Javaheri, Head of Equities Quantitative Research Americas, J.P. Morgan [Presentation]
Doug Costa, Head of Quantitative Research, Susquehanna International Group [Presentation]
Cocktail Reception