We study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information. Our price-setters overestimate their abilities to infer aggregate shocks from private signals. The fraction of uninformed firms is endogenous; firms can obtain...

The evidence of volatility-price dependence observed in previous works (Karakatsani and Bunn 2004; Bottazzi, Sapio and Secchi 2005; Simonsen 2005) suggests that there is more to volatility than simply spikes. Volatility is found to be positively correlated with the lagged price level in settings where...

In this note, we consider the relationship between oil price volatility and firm returns for 560 firms listed on the New York Stock Exchange. Using daily time series data from 2000 to 2008, we find that oil price volatility increases firm returns for the majority of the firms in our sample.

In this paper, we present our study on using the hybrid stochastic-local volatility (SLV) model for option pricing. The SLV model contains a stochastic volatility component represented by a volatility process and a local volatility component represented by a so-called leverage function. The...

This thesis presents our study on using the hybrid stochastic-local volatility model for option pricing. Many researchers have demonstrated that stochastic volatility models cannot capture the whole volatility surface accurately, although the model parameters have been calibrated to replicate...

Recently, Diebold and Li (2003) obtained good forecasting results for yield curves in a reparametrized Nelson-Siegel framework. We analyze similar modeling approaches for price curves of variance swaps that serve nowadays as hedging instruments for options on realized variance.We consider the...

The huge increase of HFT activity in recent years has posed the crucial question of whether it is beneficial for financial markets to both researchers and regulators. Recent academic research has studied the impact of HFT on different measures of market quality, such as liquidity, transaction...

This paper develops a theoretical analysis of share market price formation driven by accounting and market structures. Heterogeneous investors are assumed to discover and process fundamental information disclosed by accounting system of share-issuing entity. Information set available to share...

We present a framework for optimal execution in presence of stochastic volatility. The theoretical model utilizes the fair pricing theory of market impact and the Heston model for volatility. We use computer optimization to solve common trading problems, including optimal execution schedules on...

Do high frequency traders affect transaction prices? In this paper we derive distributions of transaction prices in limit order markets populated by low frequency traders (humans) before and after the entrance of a high frequency trader (machine). We find that the presence of a machine is likely...