The risk management of derivative portfolios is vulnerable to model error. This paper explores risk management strategies based on no-arbitrage bounds, which are independent of any model. In particular, we determine the bounds on the price of a general barrier option given the price of a set of...

Motivated by the implied stochastic volatility literature (Britten-Jones and Neuberger (1998), Derman and Kani (1997), Ledoit and Santa-Clara (1998)) this paper proposes a new and general method for constructing smile-consistent stochastic volatility models. The method is developed by...

This empirical study is motivated by the literature on quot;smile-consistentquot; arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified...

We model seasonal, uncertain production of a commodity, with speculative storage. We allow agents to be risk averse, and we allow planned production to respond to price prospects. We also explicitly consider the presence or absence of a futures market in the commodity. Our technique involves a...

We study a continuous time model of a levered firm with fixed assets generating a cash flow which fluctuates with business conditions. Since external finance is costly, the firm holds a liquid (cash) reserve to help survive periods of poor business conditions. Holding liquid assets inside the...

In the Samp;P500 futures options, we identify 3 factors, corresponding to movements in the underlying, parallel movements, and tilting of the cross section of implied volatilities (the quot;smirk factor''). We relate these factors non-linearly to movements in the option prices. They are...

We construct portfolios of Samp;P500 futures and their associated options, which are Delta (price) and Vega (volatility) neutral. These systematically earn negative abnormal returns, and suggest that out of the money puts are too expensive, relative to out of the money calls. We give evidence...

This paper is concerned with the behavior of the risk premium on the market portfolio of risky assets. The paper provides a characterization of the evolution of the market risk prem ium in economies where the variance of the return on the market has constant variance and market index options can...