Equilibrium and arbitrage-based option pricing models are based on the assumption that the derivative and its underlying asset are simultaneously observable. However, empirical testing with transactions data must deal with less than perfect synchronicity and windows defining a ‘match’...

A wide variety of diffusions used in financial economics are mean-reverting and many have state- and time-dependent volatilities. For processes with the latter property, a transformation along the lines suggested by Nelson and Ramaswamey can be used to give a diffusion with constant volatility...

Absent liquidity in long-term futures or forward markets, firms use nearby contracts to hedge long-term commitments. To hedge commodities that exhibit stochastic convenience yield, adjustments to the naive stacked hedge are necessary. Simulated and empirical tests of the hedging model using oil,...