We propose a pairs trading model that incorporates a time-varying volatility of the Constant Elasticity of Variance type. Our approach is based on stochastic control techniques; given a fixed time horizon and a portfolio of two cointegrated assets, we define the trading strategies as the...

We explore the implications for asset prices and implied volatilities in an equilibrium model of commodity production. Production of the commodity can be carried out in one of two regimes. In the first regime the reserves are set in constant decline while in the second regime new additions to...

This paper investigates the optimal asset-liability management problems for two managers subject to relative performance concerns in the presence of stochastic inflation and stochastic volatility. The objective of the two managers is to maximize the expected utility of their relative terminal...

We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their "distance" to a reference local volatility model. In...

We study general equilibrium asset prices in a multi-period endowment economy when agents' risk aversion is allowed to depend on the maturity of the risk. We find horizon-dependent riskaversion preferences generate a decreasing term structure of risk premia if and only if volatility is...