Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper explores price...

Machine learning applications in finance commonly employ feature decorrelation techniques developed for generic statistical problems. We investigate whether this practice appropriately addresses the unique characteristics of financial data, where correlations often encode fundamental economic...

This paper aims to develop optional semimartingale methods in risk theory to allow for a larger class of risk models. Optional semimartingales are left-continuous with right-limit stochastic processes defined on a probability space where the usual conditions - completeness and right-continuity...

Certain fixed-income securities, such as callable bonds and mortgage-backed securities subject to prepayment, typically exhibit negative convexity at low yields and cannot be adequately immunized through duration and convexity-matching alone. To address this residual risk, we examine the...

This paper proposes an alternative solution to the problem related to the risk that banks incur in the protection of deposits. This solution lies in the use by banks of contingent convertible leasing contracts to face financial distress situations by solidifying their own funds and thus...

We study the shape of the Bachelier-implied volatility of a spread option on two assets following correlated local volatility models. This includes the limiting case of spread options on two correlated Black-Scholes (BS) assets. We give an analytical result for the at-the-money (ATM) skew of the...

The combination of stochastic derivative pricing models and downside risk measures often leads to the paradox (risk, return) = (−infinity, +infinity) in a portfolio choice problem. The construction of a portfolio of derivatives with high expected returns and very negative downside risk...

This study aims to develop an accurate option pricing model for car leases by introducing a put option valuation framework based on the Weibull distribution. Traditional models typically assume asset values follow a lognormal distribution, failing to capture the left-skewed nature and bounded...

This study examines whether changes in the implied volatility of stock options have cross-sectional predictability for future changes in credit default swap (CDS) spreads in the Korean market. The major findings are as follows. First, in the CDS portfolio analysis, when buying a portfolio with...

This study explores an innovative approach to incorporating option strategies into equity portfolios. It presents an alternative direction that institutional investors could take to overcome their current challenges, in a context where traditionally diversified portfolios of only equity and...

We utilize Bayesian model averaging to estimate a stochastic discount factor (SDF) for single-stock options. A Bayesian model averaging SDF outperforms reduced-form benchmark models in-sample and out-of-sample in pricing option return anomalies and portfolios. We document that the SDF is dense...

The popular Wishart (WI) processes, first introduced by Bru in 1991, exhibit convenient analytical properties for modeling asset prices, particularly a closed-form characteristic function, and the ability to jointly model stochastic volatility and correlation. These features tend to increase...

This paper demonstrates that perfectly calibrating a multi-asset model to observed market prices of all basket call options is insufficient to uniquely determine the price of a best-of call option. Previous research on multi-asset option pricing has primarily focused on complete market settings...

In this paper, we study perpetual American put options with a generalized standard put payoff and establish sufficient conditions for the existence and uniqueness of the solution to the associated pricing problem. As a key tool, we express the Black-Scholes operator in terms of elasticity. This...

This paper enhances the calibration procedure for pricing spread options with liquidity risk. The novelty is the use of Chebyshev interpolation to fit the prices.Numerical experiments reveal that the calibrated parameters are close to the ones obtained by a previous work. However, the fit...

We analyze a market-wide panel dataset on retail options trading from India, a market with an 80% share in option contracts traded worldwide. Retail traders both concentrated in and dominate index options trading. They exhibit short-term speculative behavior with significant day trading, short-...

This study examines the performance dynamics of U.S. options exchange-traded funds (ETFs), whose investment strategy involves options contracts. Analyzing monthly returns data from February 2014 to April 2023, we evaluate the risk-adjusted performance, volatility, and market sensitivity of U.S....

Modeling implied volatility (IV) is important for option pricing, hedging, and risk management. Previous studies of deterministic implied volatility functions (DIVFs) propose two parameters, moneyness and time to maturity, to estimate implied volatility. Recent DIVF models have included factors...

We derive methods for risk-neutral pricing of multi-asset options, when log-returns jointly follow a multivariate tempered stable distribution. These lead to processes that are more realistic than the better known Brownian motion and stable processes. Further, we introduce the diagonal tempered...

This paper addresses the challenges associated with pricing exotic options, specifically path-dependent ones, with a focus on the limitations of standard Monte Carlo simulations and the advantages provided by Conditional Monte Carlo methods, introduced by Babsiri and Noel in 1998. Path dependent...

This thesis contains three studies on the impact of new technologies on financial markets. The first study investigates in an experiment whether algorithmic trading has an impact on the formation of asset price bubbles. It finds that especially market-maker algorithms lead to traded prices being...

Many investors and financial managers are interested in derivatives, which are financial instruments that derive their value from an underlying asset. These instruments have become popular due to their low initial requirements for futures trading and the need to pay premiums for options. The aim...

Government bond yield futures and related option contracts contain information on the asymmetry of interest rate risks. We construct probability distributions of marketimplied bond yield expectations up to 90 calendar days ahead between January 2018 and December 2023. We derive daily...

Slightly over fifty years ago, the Black-Scholes option pricing model revolutionized investing by enabling a shift from linear to non-linear payoff structures. Myron Scholes later published two papers documenting the performance of passive option strategies that outperformed the underlying index...