A comprehensive description of the trading and statistical characteristics of VIX futures and their exchange-traded notes motivates our study of their benefits to equity investors seeking to diversify their exposure. We analyze when diversification into VIX futures is ex-ante optimal for...

This paper introduces a new class of generalized beta-generated distributions that have very flexible shapes and tractable properties. Their quantiles and moments have a simple closed form and they are maximum entropy distributions under three simple conditions. Two special cases are the...

We model investment opportunities with a single source of uncertainty, i.e. the market price of the investment. Investment cost can be predetermined or perfectly correlated with the market price. The common paradigm for risk-neutral real-option pricing is a special case en- compassed within our...

Most banks employ historical simulation for Value-at-Risk (VaR) calculations, where VaR is computed from a lower quantile of a forecast distribution for the portfolio’s profit and loss (P&L) that is constructed from a single, multivariate historical sample on the portfolio’s risk factors....

Recent research advocates volatility diversification for long equity investors. It can even be justified when short-term expected returns are highly negative, but only when its equilibrium return is ignored. Its advantages during stock market crises are clear but we show that the high...

It is widely accepted that some of the most accurate predictions of aggregated asset returns are based on an appropriately specified GARCH process. As the forecast horizon is greater than the frequency of the GARCH model, such predictions either require time-consuming simulations or they can be...

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, great care is...

We quantify and endogenize the model risk associated with quantile estimates using a maximum entropy distribution (MED) as benchmark. Moment-based MEDs cannot have heavy tails, however generalized beta generated distributions have attractive properties for popular applications of quantiles....

GARCH option pricing models have the advantage of a well-established econometric foundation. However, multiple states need to be introduced as single state GARCH and even Levy processes are unable to explain the term structure of the moments of financial data. We show that the continuous time...