This book is a slightly revised version of my doctoral dissertation
which has been accepted by the Department of Economics and Business
Administration of the Justus-Liebig-Universitat Giessen in July 2002. I
am indebted to my advisor Prof. Dr. Volbert Alexander for encouraging
and supporting my research. I am also grateful to the second member of
the doctoral committee, Prof. Dr. Horst Rinne. Special thanks go to Dr.
Ralf Ahrens for providing part of the data and to my colleague Carsten
Lang, who spent much time reading the complete first draft. Wetzlar,
January 2003 Martin Mandler Contents 1 Introduction. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 Part I Theoretical Foundations 2 Arbitrage Pricing and Risk-Neutral
Probabilities........ .. 7 2.1 Arbitrage Pricing in the
Black/Scholes-Merton Model... . . .. . 7 2.2 The Equivalent Martingale
Measure and Risk-Neutral Valuation
............................................... 11 2.3 Extracting
Risk-Neutral Probabilities from Option Prices. . . .. 13 2.4
Summary............................................... 15 Appendix 2A:
The Valuation Function in the Black/Scholes-Merton Model
.................................................. 16 Appendix 2B: Some
Further Details on the Replication Strategy ... 21 3 Survey of the
Related Literature .......................... 23 3.1 The Information
Content of Forward and Futures Prices. . . .. . 24 3.2 The Information
Content of Implied Volatilities ............. 25 3.2.1 Implied
Volatilities and the Risk-Neutral Probability Density
.......................................... 27 3.2.2 The Term Structure
of Implied Volatilities. . . . . . . .. . . 29 . 3.2.3 The Forecasting
Information in Implied Volatilities. . .. 30 3.2.4 Implied Correlations
as Forecasts of Future Correlations 43 VIII Contents 3.3 The Skewness
Premium ..... . . . . . . . . . . . . . . . . . . .. . . 45 . . . . . .
.
