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...

This chapter surveys the methods available for extracting information from option prices that can be used in forecasting. We consider option-implied volatilities, skewness, kurtosis, and densities. More generally, we discuss how any forecasting object that is a twice differentiable function of...

Both large oil price increases and decreases are associated with deteriorating economic conditions. Consistent with this stylized fact, we find that the projection of the state price density (SPD) on oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because...