Implied correlation and variance risk premium stand out in predicting market returns. However, while the predictive ability of implied correlation lasts for up to a year, the variance risk premium predicts market returns only for one quarter ahead. Contrary to the accepted view, implied...

The new structural model of credit risk based on a normal firm value diffusion process can infer the firm value volatility from bank credit spreads that closely agreeing with the empirically estimated firm value volatility. We use the spread-implied firm value volatility as the model volatility...

Central bank lending to commercial banks is typically collateralized which reduces central bank's credit risk exposure to “double default events” when the counterparty and the issuer of the underlying collateral asset both default in a short period of time. This paper presents a simple model...

Standard zero-lower-bound New Keynesian models generate large fiscal multipliers and expansionary negative supply shocks. Thus, according to these models, a political party that implements fiscal contraction coupled with policies to increase aggregate supply should unambiguously cause economic...

In this paper, we explore the relation between information uncertainty and S&P 500 index option returns. Since underlying state variable affecting economy is unobservable, investors have to obtain their own estimations based on available information. During such procedure, it is inevitable that...

Arbitrage is non-parametrically examined and empirically analyzed in US equity markets. Firstly, analyzed are the properties of arbitrage; and secondly, the factors explaining arbitrage are tested. Empirical analysis concerns a decade of intraday data of five US equity indices and is also...

Two alternative versions of the efficient market model are compared, a Bayesian version and an orthodox version. The Bayesian version is usually used to define an efficient market models, where markets make optimum use of all available information. However, the orthodox version is usually used...

The variance risk premium represents the compensation paid to index option sellers for the risk of losses following upward movements in realized market return volatility. Common wisdom connects these spikes with elevated uncertainty on economic fundamentals. I incorporate this link within a...

Under Black-Scholes (BS) assumptions, empirical volatility and risk neutral volatility are given by a single parameter, which captures all aspects of risk. Inverting the model to extract implied volatility from an option's market price gives the market's forecast of future empirical volatility....