Option prices, particularly those of out-of-the-money equity index puts, are difficult to justify in a no-arbitrage framework. This paper shows how limits to arbitrage affect the relative pricing of out-of-the-money put vs. call options (option-implied skewness). Decomposing the price of...

Fixed income Asian options are frequently adopted by companies to hedge interest rate risk. Having a payoff structure depending on the cumulative short-term rate makes them particularly informativeabout interest rate volatility risk. Based on a joint dataset of bonds and Asian interest rate...

Given a spread option with underlyings X,Y and a copula model, we construct explicitly payoff functions f and g such that all first order greeks of the spread option with respect to the marginal distributions are matched by those of the replication portfolio {f(X),g(Y)}.Standard replication...

We study minute-by-minute behavior of the VIX index and trading activity in the underlying S&P 500 options to understand the impact of macro and microeconomic forces on risk neutral volatility. VIX often increases with macroeconomic news, reflects the credibility of Fed monetary stimulus, and...

This paper analyzes the valuation of day-ahead Physical Transmission Rights (PTRs) on the German-Dutch interconnector. From a financial perspective, PTRs are options written on the difference between the German and Dutch hourly electricity prices. We propose a model for the valuation of...

We propose a new measure of financial intermediary constraints based on how the intermediaries manage their tail risk exposures. Using a unique dataset for the trading activities in the market of deep out-of-the-money S&P 500 put options, we identify periods when the variations in the net amount...

We show that the dividend growth rate implied by the options market is informative about (i) the expected dividend growth rate and (ii) the expected dividend risk premium. We model the expected dividend risk premium and explore its implications for the predictability of dividend growth and stock...

We use learning in an equilibrium model to explain the puzzling predictive power of the volatility risk premium (VRP) for option returns. In the model, a representative agent follows a rational Bayesian learning process in an economy under incomplete information with the objective of pricing...

We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to...