The capability of implementing a complete Bayesian analysis of experimental data has emerged over recent years due to computational advances developed within the statistical community. The objective of this paper is to provide a practical exposition of these methods in the illustrative context...

A formula is derived for the 'effective' skew in a stochastic volatility model with a time-dependent local volatility function. The formula relates the total amount of skew generated by the model over a given time period to the time-dependent slope of the instantaneous local volatility function....

We compute the first-order corrections to marginal utility-based prices with respect to a 'small' number of random endowments in the framework of three incomplete financial models. They are a stochastic volatility model, a basis risk and market portfolio model and a credit-risk model with jumps...

We develop call option price approximations for both the market index and an individual asset using a singular perturbation of a continuous-time capital asset pricing model in a stochastic volatility environment. These approximations show the role played by the asset's beta parameter as a...

In this article, we solve the variance-optimal hedging problem in stochastic volatility (SV) models based on time-changed Levy processes, that is, in the setup of Carr et al. (2003). The solution is derived using results for general affine models in the companion article [Kallsen and Pauwels...

We propose a general framework to assess the value of the financial claims issued by the firm, European equity options and warrantsin terms of the stock price. In our framework, the firm's asset is assumed to follow a standard stationary lognormal process with constant volatility. However, it is...

Recent studies of bond pricing dynamics and stochastic term structure models have focused on Markovian spot rate processes with deterministic volatilities. In this paper we provide and extension to allow for stochastic volatility functions and investigate conditions under which the dynamics of...

A passport option is a call option on the profits of a trading account. In this article, the robustness of passport option pricing is investigated by incorporating stochastic volatility. The key feature of a passport option is the holders' optimal strategy. It is known that in the case of...

The paper describes an implicit finite difference approach to the pricing of American options on assets with a stochastic volatility. A multigrid procedure is described for the fast iterative solution of the discrete linear complementarity problems that result. The accuracy and performance of...

Following the increasing awareness of the risk from volatility fluctuations, the market for hedging contracts written on realized volatility has surged. Companies looking for means to secure against unexpected accumulation of market activity can find over-the-counter products written on...