Campus Only Senior Thesis
Bachelor of Arts
© 2012 Andrew Henry Oetting
The purpose of this paper is threefold. First, the paper builds on the work done previously done in the area of option implied probability distribution functions (PDFs) by extending the methods described by Breeden and Litzenberger (1978) to individual equity options. Second, it describes a closed-form, onto mapping from a two-dimensional volatility surface to the risk-neutral PDF. Lastly the paper performs an event study on the implied risk-neutral PDFs of companies which are the target of corporate takeover. While there was not sufficient data to determine any statistical relationship, there is observational evidence that option market implied PDFs may be predictive of future takeovers.
Oetting, Andrew Henry, "Bastardizing Black-Scholes: The Recovery of Option-Implied Probability Distributions and How They React to Corporate Take Announcement" (2012). CMC Senior Theses. 465.
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