This paper illustrates regression and Kalman filtering methods for estimating the time-varying term structure of volatility expectations revealed by options prices. Short- and long-term expectations are estimated for four currencies using daily PHLX options prices from 1985 to 1989. Throughout...

The autoregressive conditional heteroscedasticity/generalized autoregressive conditional heteroscedasticity (ARCH/GARCH) literature and studies of implied volatility clearly show that volatility changes over time. This article investigates the improvement in the pricing of Financial...

The study tests Longstaff's martingale restriction on S&P 500 index options over the period 1990–1994. Assuming the S&P index follows a lognormal distribution results in systematic violations of the martingale restriction, the implied index value from options consistently overestimating the...

This paper uses a noisy rational expectations model to derive predictions about the dynamic behaviour of the proportion of institutional money managers in a given country who are bullish about the equity market in different countries. The predictions are tested using monthly data for four...

Empirical pricing kernels for the UK equity market are derived as the ratio between risk-neutral densities, inferred from FTSE 100 index options, and historical real-world densities, estimated from time series of the index. The kernels thus obtained are almost compatible with a risk averse...