Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. In a number of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate skewness or ignore it completely. Participants...

We consider a system where the asset values of firms are correlated with the default thresholds. We first evaluate the probability of default of a single firm under the correlated assets assumptions. This extends Merton’s probability of default of a single firm under the independent asset...

Let L be a linear space of real bounded random variables on the probability space (omega,A, P0). There is a finitely additive probability P on A, such that P tilde P0 and EP (X) = 0 for all X in L, if and only if cEQ(X) = ess sup(-X), X in L, for some constant c 0 and (countably additive)...

The empirical pricing kernels estimated from index options are non-monotone (Rosenberg and Engle, 2002; Bakshi, Madan, and Panayotov, 2010) and the corresponding risk aversion functions can be negative (Ait-Sahalia and Lo, 2000; and Jackwerth, 2000). We show theoretically that these and several other...

The prices of derivatives contracts can be used to estimate ‘risk-neutral' probability density functions that give an indication of the weight investors place on different future prices of their underlying assets, were they risk-neutral. In the likely case that investors are risk-averse, this...

We consider arbitrage-free interpolation of arbitrage-free input data of European option prices. The method derived is independent of the underlying (equity, rates, FX, etc.). A particular contribution of the paper is that for the chosen coordinate system and a wide variety of interpolation...

In this paper we implement the method of Feynman path integral for the analysis of option pricing for certain L'evy process driven financial markets. For such markets, we find closed form solutions of transition probability density functions of option pricing in terms of various special...

Characteristic functions of several popular classes of distributions and processes admit analytic continuation into unions of strips and open coni around the line of integration in the complex plane.The Fourier transform techniques reduces calculation of probability distributions and option...