We develop a lattice method for pricing lookback options in a regime-switching market environment. We assume the market is governed by a two-state Markov chain and stock volatility can change whenever the market environment changes. We develop a method which resolves the bias in the binomial...

We propose an iterative method for pricing American options under jump-diffusion models. A finite difference discretization is performed on the partial integro-differential equation, and the American option pricing problem is formulated as a linear complementarity problem (LCP). Jump-diffusion...

The notion of model-free implied volatility (MFIV), constituting the basis for the highly publicized VIX volatility index, can be hard to measure with accuracy due to the lack of precise prices for options with strikes in the tails of the return distribution. This is reflected in practice as the...

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...

With the innovation of derivatives, the Standard and Poor's (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of...

While empirical studies have established that the log-normal stochastic volatility (SV) model is superior to its alternatives, the model does not allow for the analytical solutions available for affine models. To circumvent this, we show that the joint moment generating function (MGF) of the...

In this paper, we extend the 3/2-model for VIX studied by Goard and Mazur (2013) and introduce the generalized 3/2 and 1/2 classes of volatility processes. Under these models, we study the pricing of European and American VIX options and, for the latter, we obtain an early exercise premium...

The calibration of option pricing models leads to the minimization of an error functional. We show that its usual specification as a root mean squared error implies fluctuating exotics prices and possibly wrong prices. We propose a simple and natural method to overcome these problems, illustrate...

This paper provides a number of relevant guidelines to build a consistent Volatility Smile accounting for the FX market conventions. This consistency is understood as fitting a model which is able to price vanilla options across all possible strikes given the knowledge of a few market...

The value of digital options (both European and American types) can have an inverse-U shape relationship with the volatility of the underlying process! This seemingly counterintuitive proposition is driven by a particular feature of Maringale processes bounded from below (including both the...