We develop a GARCH option model with a new pricing kernel allowing for a variance premium. While the pricing kernel is monotonic in the stock return and in variance, its projection onto the stock return is nonmonotonic. A negative variance premium makes it U shaped. We present new semiparametric...

This paper presents a new model for the valuation of European options, in which the volatility of returns consists of two components. One is a long-run component and can be modeled as fully persistent. The other is short-run and has a zero mean. Our model can be viewed as an affine version of...

Forecasting the evolution of security co-movements is critical for asset pricing and portfolio allocation. Hence, we investigate patterns and trends in correlations over time using weekly returns for developed markets (DMs) and emerging markets (EMs) over the period 1973–2012. We show that it...

Characterizing asset return dynamics using volatility models is an important part of empirical finance. The existing literature on GARCH models favors some rather complex volatility specifications whose relative performance is usually assessed through their likelihood based on a time series of...

We build a new class of discrete-time models that are relatively easy to estimate using returns and/or options. The distribution of returns is driven by two factors: dynamic volatility and dynamic jump intensity. Each factor has its own risk premium. The models significantly outperform standard...

The cross section of stock returns has substantial exposure to risk captured by higher moments of market returns. We estimate these moments from daily Standard & Poor's 500 index option data. The resulting time series of factors are genuinely conditional and forward-looking. Stocks with high...

Equity risk measured by beta is of great interest to both academics and practitioners. Existing estimates of beta use historical returns. Many studies have found option-implied volatility to be a strong predictor of future realized volatility. We find that option-implied volatility and skewness...