This study examines the role of volatility mean reversion in option pricing and evaluates the performance of commonly used volatility estimators within a broad market context. Using a comprehensive dataset of end-of-day option chains for the 100 most actively traded U.S. equities from 2018 to...

Guaranteed annuity options (GAOs) allow policyholders to convert accumulated funds into life annuities at maturity at a guaranteed minimum rate. Thus, insurers are exposed to both investment and longevity risks. Accurate valuation of these long-term, survival-contingent contracts is essential...

We uncover momentum and reversal patterns in half-day option returns that persist for up to at least 20 business days, with economic magnitudes of 0.22% to 0.45% per half-day. Specifically, returns show strong momentum within the same period (e.g., intraday-to-intraday) but reverse sharply...

The literature on derivative pricing in illiquid markets has mostly focused on computing optimal hedging controls, but empirical microstructure studies show that large order flow generates persistent and predictable price effects. Therefore, these controls can themselves induce endogenous market...

We develop a unified cost-benefit framework that allows for a better understanding of nature conservation and climate policies under risk and uncertainty. We derive modified Hotelling rules from a social planner’s welfare optimization. They reveal four forces that jointly determine market...

Modern financial systems do not exist in isolation but form part of a complex global network of interconnected financial systems. This globalization of financial systems significantly increases the risk of contagion in financial markets, impacting asset prices and other important economic...

This paper develops a unified analytical framework for pricing discretely sampled volatility-average swaps under the 4/2 stochastic volatility model. The model accommodates a broad range of volatility dynamics by combining affine and inverse-affine components in the instantaneous volatility...

This paper investigates the drivers of foreign exchange implied volatility in Central and Eastern European (CEE) countries. Currencies in non-euro EU countries are particularly sensitive to changes in market sentiment. Risk aversion significantly impacts the implied volatility surface for FX...

We develop a practical framework for identifying and quantifying the hidden layers of risks and optionality embedded in American options by introducing stochasticity into one or more of their underlying determinants. The heuristic approach remedies the problems of conventional pricing systems,...

The well-known Heath-Jarrow-Morton (HJM) framework provides a universal and efficacious instrument for modeling the stochastic evolution of an entire yield curve by explaining the interest rate dynamics in continuous time under no-arbitrage conditions. Existing implementations involve...

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...

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...

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...

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...

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...

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...