Option pricing models are calibrated to market data of plain vanillas by minimization of an error functional. From the economic viewpoint, there are several possibilities to measure the error between the market and the model. These different specifications of the error give rise to different...

The price process in a financial market is driven by demand and supply. Statistical analyses have shown that price “feeds back” on future demand and supply. To date, few testable models have been proposed that offer an economic explanation for this relationship. In this paper, we investigate a...

Like many financial contracts, derivatives are subject to default risk. A very popular mechanism in derivatives markets to mitigate the risk of non-performance on contracts is margining. By attaching collateral to a contract, margining supposedly reduces default risk. The broader impacts of the...