Graduation Year

Spring 2012

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2012 Andrew Henry Oetting

Abstract

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.

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