We document that the variance risk premium in asset returns decreases firms' investments.We theoretically model the premium; we find that it increases the value of the real optionto delay an investment and, thus, influences investments negatively. Empirically, we verifythe negative link between...

An inference method, called latent backfitting is proposed. It appears well suited for econometric models where the structural relationships of interest define the observed endogenous variables as a known function of unobserved state variables and unknown parameters. This nonlinear state space...

We analyze the relation between expected option returns and the volatility of the underlying securities. The expected return from holding a call (put) option is a decreasing (increasing) function of the volatility of the underlying. These predictions are strongly supported by the data. In the...

We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A U-shaped pricing kernel is economically most...

Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so we...