From skews to a skewed-t: modelling option-implied returns by a skewed Student-t

One of the fundamental assumptions underlying the Black-Scholes formula is that risk-neutral expected returns on an asset are normally distributed. However, the existence of volatility skews indicates that market participants assume a different underlying distribution. Knowing this distribution reveals important information on changes in market perceptions, on how to value different options, and for comparing different (international) options. A novel methodology is presented with which the implied distribution can accurately and easily be inferred from market prices