The pricing kernel is an important tool for understanding asset prices, expected returns, and investor preferences. However, empirical findings often reveal deviations from theoretical predictions, leading to the so-called "pricing kernel puzzle". This article explores the pricing kernel under...

Climate-linked bonds, issued by governments and supranational organizations, are pivotal in advancing towards a net-zero economy. These bonds adjust their payoffs based on climate variables such as average temperature and greenhouse gas emissions, providing investors a hedge against long-term...

We introduce a new Economic Distress Index (EDI), which incorporates information from all economic sectors as a device for real-time monitoring of financial stability risks in the euro area. Our approach is based on structural models of credit risk and incorporates market and balance sheet...

We utilize Bayesian model averaging to estimate a stochastic discount factor (SDF) for single-stock options. A Bayesian model averaging SDF outperforms reduced-form benchmark models in-sample and out-of-sample in pricing option return anomalies and portfolios. We document that the SDF is dense...

In this paper, we carry out a comprehensive comparison of Gaussian generalized autoregressive conditional heteroskedasticity (GARCH) and autoregressive stochastic volatility (ARSV) models for volatility forecasting using the S&P 500 Index. In particular, we investigate their performance using...

The combination of stochastic derivative pricing models and downside risk measures often leads to the paradox (risk, return) = (−infinity, +infinity) in a portfolio choice problem. The construction of a portfolio of derivatives with high expected returns and very negative downside risk...

Our aim in this paper is to analytically compute the at-the-money second derivative of the Bachelier implied volatility curve as a function of the strike price for correlated stochastic volatility models. We also obtain an expression for the short-term limit of this second derivative in terms of...

This paper develops a semiparametric estimation method that jointly identifies the probability weighting and utility functions implicit in option prices. Our econometric method avoids direct specification of the objective conditional return distributions, which are instead obtained by...

Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper explores price...

We propose a method for calibrating high-dimensional parameters in the Hull-White one-factor model using market prices of swaptions, aimed at generating mark-to-market interest rate scenarios in the Korean insurance industry. Our approach integrates a trust region-based Bayesian optimization...

Market turnover levels and liquidity changes across various territories significantly influence currency prices, leading to continuous fluctuations. Consequently, traders and investors constantly seek strategies to mitigate exchange rate risks. This study aimed to measure and assess foreign...

This study develops a novel method for mitigating credit risk through the use of structured derivatives, focusing in particular on the use of European put options as a strategic hedging tool. Inspired by the work of Merton (1974), our approach introduces the concept of default triggered by the...

Government bond yield futures and related option contracts contain information on the asymmetry of interest rate risks. We construct probability distributions of marketimplied bond yield expectations up to 90 calendar days ahead between January 2018 and December 2023. We derive daily...

We use dynamic programming, finite elements, and parallel computing to design and evaluate two-dimensional financial derivatives. Our dynamic program is flexible, as it divides the evaluation process into two components: one related to the dynamics of the underlying process and the other to the...