In usual pricing approaches for weather derivatives, forward-looking information such as meteorological weather forecasts is not considered. Thus, important knowledge used by market participants is ignored in theory. By extending a standard model for the daily temperature, this paper allows the...

Option-implied moments, like implied volatility, contain useful information about an underlying asset's return distribution, but are derived under the risk-neutral probability measure. This paper shows how to convert risk-neutral moments into the corresponding physical ones. The main theoretical...

We develop a novel pricing strategy that approximates the value of an American option with exotic features through a portfolio of European options with different maturities. Among our findings, we show that: (i) our model is numerically robust in pricing plain vanilla American options; (ii) the...

This paper studies option pricing based on a reverse engineering (RE) approach. We utilize artificial intelligence in order to numerically compute the prices of options. The data consist of more than 5000 call- and put-options from the German stock market. First, we find that option pricing...

This paper considers discrete time GARCH and continuous time SV models and uses these for American option pricing. We perform a Monte Carlo study to examine their differences in terms of option pricing, and we study the convergence of the discrete time option prices to their implied continuous...

The accurate specification of the process that the temperature follows over time is a prerequisite for the pricing of temperature derivatives. To this end, a horse race of alternative specifications of the dynamics of temperature is conducted by evaluating their out-of-sample forecasting...

Recent empirical studies report predictable dynamics in the volatility surfaces implied by observed index option prices, as prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that...

In this article we derive risk-neutral option price formulas for both plain-vanilla and exotic electricity futures derivatives on the basis of diverse arithmetic multi-factor Ornstein-Uhlenbeck spot price models admitting seasonality, while – in order to avoid “information...

We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that...

Volatility implied from observed option contracts systematically varies with the contracts' strike price and time to expiration, giving rise to an instantaneously non-flat implied volatility surface (IVS) that exhibits substantial time variation. We identify a number of latent factors that drive...