As an extension to the Fama and French three factor model (FF), this paper investigates the time-varying risk premiums of sector exchange traded funds (ETF) under a Markov regime-switching framework. In addition to the three style factors in the FF model, three macro factors: changes in market...

Covered interest rate parity assumes that there is no risk premium on the hedged returns on currencies. However, empirical evidence indicates that risk premiums are not identically zero, and this is referred to as the forward premium puzzle. We show that there exist market regimes, within which...

Standard delta hedging fails to exactly replicate a European call option in the presence of transaction costs. We study a pricing and hedging model similar to the delta hedging strategy with an endogenous volatility parameter for the calculation of delta over time. The endogenous volatility...