This paper presents a joint analysis of the term structure of credit default swap (CDS) spreads and the implied volatility surface. The rapid development of the CDS market has provided convenient products to extract credit risk, and its interaction with equity volatility has been analyzed in...

Using prices of both S&P 500 options and recently introduced VIX options, we study asset pricing implications of volatility risk. While pointing out the joint pricing kernel is not identified nonparametrically, we propose model-free estimates of marginal pricing kernels of the market return and...

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...

Are options on more volatile assets expected to provide higher or lower return? Using analytics, we show the ambiguous nature of the answer when the volatility differential is due to the systematic/priced risk. Here the difference in the expected return of the assets also matters and has an...

An anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse...

I show that the inventory risk faced by market-makers has a first-order effect on option prices. I introduce a simple approach that decomposes the price impact of trades into inventory risk and asymmetric information components. While both components are large for option trades, the inventory...

We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option’s implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and...

This paper describes an empirical study of the information content of daily share prices and American put and call option mid-quotes about their generating process. Considering stock return and its volatility as the risk factors and without parameterizing their historical joint dynamics, two...

This paper introduces the autocorrelation effect of assets' returns into the valuation model of reset options. The MA(q) process, which is an extension of MA(1) process noted by Liao and Chen (2006), is applied to the valuation of reset options in this paper. Due to the impact of autocorrelation...

The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type and to compare option-based forecasts with historical volatility. The different information content of implied volatility is examined for the most...