We propose a new modeling framework for the valuation of European options, in which dynamic short and long run volatility components drive the smile dynamics. The model state dynamics is driven by a matrix jump diffusion, provides efficient pricing formulas for plain vanilla options by means of...

We introduce a new class of flexible and tractable matrix affine jump-diffusions (AJD) to model multivariate sources of financial risk. We first provide a complete transform analysis of this model class, which opens a range of new potential applications to, e.g., multivariate option pricing with...

We study a new class of three-factor affine option pricing models with interdependent volatility dynamics and a stochastic skewness component unrelated to volatility shocks. These properties are useful in order (i) to model a term structure of implied volatility skews more consistent with the...

Testing procedures for predictive regressions with lagged autoregressive variables imply a suboptimal inference in presence of small violations of ideal assumptions. We propose a novel testing framework resistant to such violations, which is consistent with nearly integrated regressors and...