Widespread violations of stochastic dominance by 1-month Samp;P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although precrash option prices conform to the...

Widespread violations of stochastic dominance by one-month Samp;P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the...

Appendix A demonstrates an error in the Genotte and Jung (1994) solution; Appendix B presents the Hamilton-Bellman-Jacoby equation in continuous time; Appendix C presents the exact solution in discrete time; Appendix D presents a numerical solution to the Liu and Loewenstein (2007) problem

We formulate a Cournot-type market equilibrium model of simultaneous trading in the CDS and Loan CDS (LCDS) markets. We use novel formulations of two-market demand functions that include trading costs and margins. The equilibrium identifies a relation between premiums, elasticities and recovery...

We use a novel definition of tail risk for option pricing purposes, based on the concept of almost stochastic dominance (ASD) in order to examine empirical “puzzles” documented in several high profile studies of the market for S&P 500 index options. We find that with one exception these...

We show that the stochastic dominance (SD) approach to the valuation of index options in frictionless markets allows the derivation of a unique variance risk premium and price of volatility risk based only on the underlying return and volatility dynamics for a wide class of stochastic volatility...

We formulate a Cournot-type market equilibrium model of simultaneous trading in the CDS and Loan CDS (LCDS) markets. We use novel formulations of two-market demand functions that include trading costs and margins. The equilibrium identifies a relation between premiums, elasticities and recovery...