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Decomposition of Option Implied information and Its Applications
The attitude of market participants towards future market trend can be reflected by market prices of options. Therefore, option implied information is believed to be forward looking. The information we can extract from option prices is beneficial. Another interesting topic in finance in recent years is applying technologies in engineering, such as signal processing, on analysing financial time series, which is normally inclusive of oscillations in different frequencies. Signal processing methods help decompose them in to finer time series in accordance with their frequencies, which makes it possible for us to investigate the characteristics of these financial data more precisely.
The extraction of different option implied information and with the assistance of signal processing technologies, investigate the benefits and applications of decomposed option implied information, such as increase in predictive power, better portfolio performance and prediction of extreme events etc. Departuring from information implied by options written on Dow Jone industrial Average Index and its constituent stocks.