A Markov chain with an expanding non-uniform grid matching risk neutral marginal distributions is constructed. Conditional distributions of the chain are in the variance gamma class with prespecified skewness and excess kurtosis. Time change and space scale volatilities are calibrated from...

This study formalizes the departure between risk-neutral and physical index return volatilities, termed volatility spreads. Theoretically, the departure between risk neutral and physical index volatility is connected to the higher-order physical return moments and the parameters of the pricing...

Hedge funds are fundamentally exposed to equity volatility, skewness, and kurtosis risks based on the systematic pattern and significant spread in alphas from the existing models that do not control for the higher-moment risks. The spread and pattern in alphas do not disappear with bootstrap...

This paper studies how expected returns interact with product market competition. We present a model in which product market competition is jointly captured by the industry concentration and the average markup. We then provide empirical evidence consistent with three channels that explain the...

Learning the pre limited liability value process of equity claims and its relationship to the stock price is an answer to the financial jeorpardy question when observed option prices are the answer being given by the market. Constant dollar equity holder values, prior to the imposition of...

Allowing for correlated squared returns across two consecutive periods, portfolio theory for two periods is developed. This correlation makes it necessary to work with non-Gaussian models. The two period conic portfolio problem is formulated and implemented. This development leads to a mean ask...

When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing...

Risk premia are related to price probability ratios or for continuous time pure jump processes the ratios of jump arrival rates under the pricing and physical measures. The variance gamma model is employed to synthesize densities with risk premia seen as the ratio of the three parameters. The...

Three particular models of dependence in asset returns with non-Gaussian marginals are investigated on daily return data for sector exchange traded funds. The first model is a full rank Gaussian copula (FGC). The second models returns as a linear mixture of independent Lévy processes (LML). The...

Portfolios are designed to maximize a conservative market value or bid price for the portfolio. Theoretically this bid price is modeled as reflecting a convex cone of acceptable risks supporting an arbitrage free equilibrium of a two price economy. When risk acceptability is completely defined...