Proposals to introduce derivatives whose payouts are explicitly linked to the volatility of an underlying asset have been around for some time. In response to these proposals, a few papers have tried to develop valuation formulae for volatility derivatives ? derivatives that essentially help...

This paper develops a closed-form option pricing formula for a spot asset whose variance follows a GARCH process. The model allows for correlation between returns of the spot asset and variance and also admits multiple lags in the dynamics of the GARCH process. The single factor (one lag)...

State-of-the-art stochastic volatility models generate a quot;volatility smirkquot; that explains why out-of-the-money index puts have high prices relative to the Black-Scholes benchmark. These models also adequately explain how the volatility smirk moves up and down in response to changes in...

We examine the influence of industrial structure on the cross-sectional volatility and correlation structure of country index returns for 12 European countries between 1978 and 1992. We find that industrial structure explains very little of the cross-sectional difference in country return...

This paper investigates the structure of international stock returns in Europe and the U.S., and examines whether international capital markets are integrated. Using data on 6000 firms in the U.S. and twelve European countries from 1978 to 1990, we find evidence that countries share multiple...

Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross-section of stock returns. We find a striking pattern of return continuation at half-hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40...

This paper develops a closed-form option valuation formula for a spot asset whose variance follows a GARCH(p,q) process that can be correlated with the returns of the spot asset. It provides the first readily computed option formula for a random volatility model that can be estimated and...

This paper develops a closed-form option valuation formula for a spot asset whose variance follows a GARCH(p,q) process that can be correlated with the returns of the spot asset. It provides the first readily computed option formula for a random volatility model that can be estimated and...

This paper develops an equilibrium model in which interest rates follow a discontinuous (generalized) gamma process. The gamma process has finite variation, takes an infinite number of quot;smallquot; jumps in every interval, and includes the Wiener process as a limiting case. The gamma interest...

There is extensive empirical evidence that index option prices systematically differ from Black-Scholes prices. Out-of-the-money put prices (and in-the-money call prices) are relatively high compared to the Black-Scholes price. Motivated by these empirical facts, we develop a new discrete-time...