The Markov Tree model is a discrete-time option pricing model that accounts for short-term memory of the underlying asset. In this work, we compare the empirical performance of the Markov Tree model against that of the Black-Scholes model and Heston's stochastic volatility model. Leveraging a...

This paper addresses the relationship between stock markets and credit default swaps (CDS) markets. In particular, I aim to gauge if the co-movement between stock prices and sovereign CDS spreads increases with the deterioration of the credit quality of sovereign debt. The analysis of...

Using a semi-supervised topic model on 7,000,000 New York Times articles spanning 160 years, we test whether topics of media discourse predict future stock and bond market returns to test rational and behavioral hypotheses about market valuation of disaster risk. Focusing on media discourse...

We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order...

Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become 'expensive' relative to the Black-Scholes benchmark. Many researchers...

Many financial instruments are designed with embedded leverage such as options and leveraged exchange traded funds (ETFs). Embedded leverage alleviates investors' leverage constraints and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis,...

The Baker and Wurgler (2006) sentiment index purports to measure irrational investor sentiment, while the University of Michigan Consumer Sentiment Index is designed to largely reflect fundamentals. Removing this fundamental component from the Baker and Wurgler index creates an index of investor...

The study adds an empirical outlook on the predicting power of using data from the future to predict future returns. The crux of the traditional Capital Asset Pricing Model (CAPM) methodology is using historical data in the calculation of the beta coefficient. This study instead uses a battery...

In this article, we test the capital asset pricing model (CAPM) on the Warsaw Stock Exchange (WSE) by measuring the performance of two portfolios composed of construction firms: family-controlled and nonfamily controlled. These portfolios were selected from the WIG-Construction (WIG-Warszawski...

Since 1980, foreign investors have timed their purchases and sales of U.S. Treasurys to yield particularly low returns. Their annual dollar-weighted returns, measured by IRRs, are around 3% lower than a buy-and-hold strategy over the same horizon. In comparison, the IRRs achieved by domestic...