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Is it possible to use bid-ask spreads on contracts from a specific tenor to estimate risk aversion and use it to transform risk-neutral density into real-world density?

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  • $\begingroup$ Please note that self destruction of content is not allowed. $\endgroup$ – Bob Jansen May 29 '20 at 18:57
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Bid Ask spreads should reflect the willingness of parties to exchange at a certain price, where market makers are the sellers it represents the risks they are prepared to take in order to make the the market, but as most trades now are through secondary sellers, not market makers or in dark pools, it would be impossible to estimate the initial risk of a market maker, I do remember option writer Sheldon Natenberg discussed the topic, I can not recall the source, he is author of the timeless classic which put volatility on the map, Option Pricing and Volatility, I have seen a few other things but they are not really practically implementable, only of theoretical interest so I did not carefully collate and annotate, sorry.

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You are mixing 2 different concepts. bid-offer spread is reflective of transaction costs, not of risk aversion of market-makers.

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