Maximum likelihood estimation of discretely observed diffusion processes is mostly hampered by the lack of a closed form solution of the transient density. It has recently been argued that a most generic remedy to this problem is the numerical solution of the pertinent Fokker-Planck (FP) or...

We develop a penalized two-pass regression with time-varying factor loadings. The penalization in the first pass enforces sparsity for the time-variation drivers while also maintaining compatibility with the no arbitrage restrictions by regularizing appropriate groups of coefficients. The second...

This paper shows how exact solutions for the transient density of a large class of continuous-time Markov switching models can be obtained. We illustrate the pertinent approach for both simple diffusion models with a small number of regimes as well as for the more complicated so-called Poisson...

The Efficiency Market Hypotheses (EMH) imply rational investors and no asset mispricing in the medium run. This paper critically evaluates on the point of whether an asset price bubble is an irrational phenomenon that cannot be detected. Thereby, I review the existing literature and reflect on...

The influence of past stock price movements on volatilities and correlations is essential for understanding diversification and contagion in financial markets. We develop a model that makes the influence of past returns on volatilities and correlations explicit. Employing information about...

This study presents and empirically tests a simple framework that examines the effects of market liquidity (the ease with which stocks are traded) and funding liquidity (the ease with which market participants can obtain funding) on stock market bubbles. Three key findings emerge from this...

We characterize time-varying disaster risk using interbank rates and their options. The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We make an identification assumption that macroeconomic disasters coincide with banking...