This paper is devoted to the problem of hedging contingent claims in the framework of a complete two-factor jump-diffusion model. In this context, it is well understood that every contingent claim can be hedged perfectly if one invests the unique arbitrage-free price. Based on the results of H....

Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under...

It is common practice to identify the number and sources of shocks that move implied volatilities across space and time by applying Principal Components Analysis (PCA) to pooled covariance matrices of changes in implied volatilities. This approach, however, is likely to result in a loss of...

This paper considers the introduction of stock options in an (dynamically) incomplete securities market made up of a riskless bond and the stock. The stock price follows a geometric Brownian motion with constant drift. However, there is incomplete information about the unknown stochastic...

Using option prices the expectations of the market participants concerning the underlying asset can be extracted as well as the uncertainty surrounding these expectations. In this paper a mixture of lognormal density functions will be assumed to analyze options on three-month Euribor futures for...

We consider an additive model with second order interaction terms. It is shown how the components of this model can be estimated using marginal integration, and the asymptotic distribution of the estimators is derived. Moreover, two test statistics for testing the presence of interactions are...

In this paper we study nonparametric estimation and hypothesis testing procedures for the functional coefficient AR (FAR) models of the form Xt = f1(Xt-d)Xt-1 +…+ fp(Xt-d)Xt-p +εt, first proposed by Chen and Tsay (1993). As a direct generalization of the linear AR model, the FAR model is a...

This paper provides a test of convexity of a regression function. This test is based on the least squares splines. The test statistic is shown to be asymptotically of size equal to the nominal level, while diverging to infinity if the convexity is misspecified. Therefore, the test is consistent...

A general model specification test of a parametric model against a nonparametric or semiparametric alternative is studied. The test statistic employs a fixed kernel, not varying by a bandwidth. This test is proved to be consistent, the asymptotic distribution is derived and shown to be...

In this paper a Canonical Correlation Analysis (CCA) is used to test the hypothesis r = r0 against the alternative r r0. Such a test flips the null and alternative hypotheses of Johansen's LR test and can be used jointly with the LR test to construct a confidence set for the cointegration rank....