Haley and Walker (2010) present the Euclidean and Empirical Likelihood nonparametric option pricing models as alternative tilts to Stutzer's (1996) Canonical pricing method. We empirically test the comparative strengths of each of these methods using a large sample of traded options on the...

This paper presents a joint analysis of the term structure of credit default swap (CDS) spreads and the implied volatility surface for European countries during 2007-2012, a sample period covering both the Global Financial Crisis and the European debt crisis. We analyze to which extent...

In this paper we solve the discrete time mean-variance hedging problem when asset returns follow a multivariate autoregressive hidden Markov model. Time dependent volatility and serial dependence are well established properties of financial time series and our model covers both. To illustrate...

We begin with an overview of classical theories and empirical methods for option pricing and hedging without transaction costs, and then with a brief review of developments in the corresponding theory when there are transaction costs. An interesting feature of the optimal hedging strategy in the...

We test the accuracy and hedging performance of the deltas given by a range of nonparametric measure changes. The nonparametric models accurately estimate deltas across a number of asset price dynamics. The optimal nonparametric measure change displays superior estimation bias, which depends on...

We address a very topical – and to some extent, intractable – question: When should I hedge? By analysing South African historical market returns, we show that only a handful of extreme returns – which are well characterised by two simple quantitative indicators – can have a significant...

The concept of stress levels embedded in S&P 500 options are defined and illustrated with explicit constructions. The particular example of a stress function used is MINMAXVAR. Seven joint laws for the top 50 stocks in the index are considered. The first time changes a Gaussian one factor...

With the innovation of derivatives, the Standard and Poor's (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of...

In this paper, we consider hedging and pricing of illiquid options on an untradable underlying asset, where an alternative instrument is used as a hedging instrument. We assume that the trade price of the hedging instrument is subject to market impacts caused by the hedger, as well as the...