In this paper we extend the model of Easley and O'Hara (1992) to allow the arrival rates of informed and uninformed trades to be time-varying and forecastable. We specify a generalized autoregressive bivariate process for the arrival rates of informed and uninformed trades and estimate the model...

We test whether momentum-based strategies remain profitable after considering market frictions induced by trading. Intra-day data are used to estimate alternative measures of proportional (spread) and non- proportional (price impact) trading costs. A cross-sectional model of the relation between...

One of the most relevant issues in the risk analysis of the financial institutions´ investments is to determine the capital allocation in order to maintain its solvency and liquidity in adverse situations. The portfolio risk analysis is necessary for assuring the right selection of that capital...

In the context of arbitrage-free modelling of financial derivatives, we introduce a novel calibration technique for models in the affine- quadratic class for the purpose of contingent claims pricing and risk- management. In particular, we aim at calibrating a stochastic volatility jump diffusion...

For option whose striking price equals the forward price of the underlying asset, the Black-Scholes pricing formula can be approximated in closed-form. A interesting result is that the derived equation is not only very simple in structure but also that it can be immediately inverted to obtain an...

The security dynamics described by the Black-Scholes equation with price-dependent variance can be approximated as a damped discrete-time hopping process on a recombining binomial tree. In a previous working paper, such a nonuniform tree was explicitly constructed in terms of the continuous-time...

We analyze the specifications of option pricing models based on time- changed Levy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process...

Critics regarding the Black and Scholes model aren't new. The model was about of being labelled 'historic'. It is new now that the model has become an auto-nomous, unreflected item in international accounting standards and law allowing "creative" accounting. There is no economial relation...

Interest-rate derivative models governed by parabolic partial differential equations (PDEs) are studied with discrete-time recombining binomial trees. For the Buehler-Kaesler discount-bond model, the expiration value of the bond is a limit point of tree sites. Representative calculations give a...

This paper provides an introduction to Monte Carlo algorithms for pricing American options written on multiple assets, with special emphasis on methods that can be applied in a multi-dimensional setting. Simulated paths can be used to estimate by nonparametric regression the continuation value...