Option pricing model with non-constant volatility models are compared to stochastic volatility ones. The non-constant volatility models considered are the Dupire's local volatility and Hobson and Rogers path-dependent volatility models. These approaches have the theoretical advantage of...

This paper compares the goodness-of-fit and the stability of six methods used to extract risk-neutral probability density functions from currency option prices. We first compare five existing methods commonly employed to recover risk-neutral density functions from option prices. Specifically, we...

Consider a non-spanned security C_{T} in an incomplete market. We study the risk/return trade-offs generated if this security is sold for an arbitrage-free price Câ‚€ and then hedged. We consider recursive "one-period optimal" self-financing hedging strategies, a simple but tractable...

The fact that expected payoffs on assets and call options are infinite under most log-stable distributions led both Paul Samuelson (as quoted by Smith 1976) and Robert Merton (1976) to conjecture that assets and derivatives could not be reasonably priced under these distributions, despite their...

In this paper we explore ways that alleviate problems of nonparametric (artificial neural networks) and parametric option pricing models by combining the two. The resulting enhanced network model is compared to standard artificial neural networks and to parametric models with several historical...