We study an investor’s asset allocation problem with a recursive utility and with tradable volatility that follows a 2-factor stochastic volatility model. Consistent with previous findings under the additive utility, we show that the investor can benefit substantially from volatility trading...

In this paper, we analyze the usefulness of technical analysis, specifically the widely employed moving average trading rule from an asset allocation perspective. We show that, when stock returns are predictable, technical analysis adds value to commonly used allocation rules that invest fixed...

Using no arbitrage principle, we derive a relation between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a...

In this study we empirically study the variance term structure using volatility index (VIX) futures market. We first derive a new pricing framework for VIX futures, which is convenient to study variance term structure dynamics. We construct five models and use Kalman filter and maximum...

VIX futures are exchange‐traded contracts on a future volatility index (VIX) level derived from a basket of S&P 500 (SPX) stock index options. The authors posit a stochastic variance model of VIX time evolution, and develop an expression for VIX futures. Free parameters are estimated from...

We construct a statistical model for the term-structure of implied volatilities of currency options based on daily historical data for 13 currency pairs over a 19-month period. We examine the joint evolution of 1 month, 2 month, 3 month, 6 month and 1 year at-the-money (50 δ) options in all the...

This paper provides an exact Bayesian framework for analyzing the arbitrage pricing theory (APT). Based on the Gibbs sampler, we show how to obtain the exact posterior distributions for functions of interest in the factor model. In particular, we propose a measure of the APT pricing deviations...