Hi nitro, Why are you comparing risk neutral distribution with real one ? Risk neutral distribution is just a tool to price derivatives. In no way it has to do with real distribution. In fact the real distribution can't be known. The only thing that is known is past prices hence a distribution based on past prices, if one does exist. Masteratwork
Do you actually believe that Lefty said that? Some ghost writer might have put that in a book or someone might add it to a screenplay but no one as sophisticated as he was could ever utter such an absurd statement.
A nice rhetorical flourish but I think it is safe to assume that Lefty has seen long shots that he believed were drastically under priced.
what is a risk neutral distribution? what do you define as the "real" distribution? I'm genuinely curious since I want to understand what you've posted. thanks!
Risk neutral distribution is the probability distribution that makes the expected future price be (today) forward price. Because the trend of an underlying doesn't make sense as one prices a derivative (because pricing models are based on a delta hedge strategy), that way, the expected future price is the forward price. Given that, if the expected future price is forward price, there's no risk at all (all the risk is erased by a delta hedging strategy). Of course, that risk neutral distribution has nothing to do with the real one. Real distribution doesn't expected that future price at maturity be today's forward one. That way, it would be better to invest all the money in a cash account. Masteratwork
No, at least it is not visible to me in this time frame. But in this thread I hint as to why it might or might not be there. http://www.elitetrader.com/vb/showthread.php?threadid=194276 If you don't use a telescope, you cannot see the rings of Saturn. If you don't use a microscope, you cannot see microscopic life. It may be that my tools are too blunt to see high kurtosis out in April.