The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by...

This paper builds on existing asset pricing models in an intertemporal capital asset pricing model framework to investigate the pricing of options on interest rate futures. It addresses the issues of selecting the preferred pricing kernel model by employing the second Hansen-Jagannathan distance...

We compare volatility forecasts using daily data and intraday data at different frequencies from the Chinese commodity futures market. Focusing on aluminium, copper and fuel oil futures contracts with 3 months to maturity, our empirical results suggest that in the out-of-sample forecasting...

Options are believed to contain unique information about the risk- neutral moment generating function (MGF hereafter) or the risk-neutral probability density function (PDF hereafter). This paper applies the wavelet method to approximate the risk-neutral MGF of the under- lying asset from option...

When jumps are present in the price dynamics of the underlying asset, the market is no longer complete, and a more general pricing framework than the risk-neutral valuation is needed. Using Monte Carlo simulation, we investigate the important diffrence between risk- neutral and physical jumps in...

We propose a nonlinear filter to estimate the time-varying default risk from the term structure of credit default swap (CDS) spreads. Based on the numerical solution of the Fokker–Planck equation (FPE) using a meshfree interpolation method, the filter performs a joint estimation of the...

We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and...

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...

It has been argued that the persistent mispricing of options, especially the overpricing of out-of-money put options, is a major reason for the often observed negative skewness in the risk-neutral price distributions of equity indices. This article investigates whether the Financial Times Stock...

In empirically deriving risk-neutral densities (RNDs) from option prices, one of the key assumptions that the strike prices should be continuous over the entire spectrum of nonnegative real numbers, is not met due to market trading mechanism. This study looks at how this failure affects the...