This thesis investigates the usefulness of the risk-neutral probability distributions implied by the KOSPI 200 index options for revealing the current sentiment of investors. The implied distributions for the KOSPI 200 index call option prices, and call and put option prices are estimated by using a mixture of two lognormals for the period of January 2000 to June 2003. I test the higher central moments, namely skewness and kurtosis, and the whole shape of the implied distributions for an indicator to extract the market atmosphere. The analysis of unstable market situations confirms that the shape of the implied distribution of the call options is helpful to reveal the investors’ expectation about the future path of the underlying asset. However the shape of the implied distributions of the call and put options is not useful to explain the developments of the market expectation. Furthermore, the skewness and kurtosis of the distributions are neither stable nor helpful to reveal the market sentiment. This reflects the limitations of two lognormal mixture methods.
