The 1987 stock market crash occurred with minimal impact on observable economic variables (e.g., consumption), yet dramatically and permanently changed the shape of the implied volatility curve for equity index options. Here, we propose a general equilibrium model that captures many salient...

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic...

Option prices are assumed to contain unique information about how market participants assess the likelihood of different outcomes for future market prices. The main object of this study is to analyse the potential value of information contained in prices of options on the OBX index at Oslo Stock...

This paper develops a closed form risk-neutral valuation model for pricing Europeanstyle options when the underlying has a mixture of transformed-normaldistributions. Specifically, we introduce the mixture of g distributions, which containsthe mixture of normal and lognormal distributions as a...

The gamma class of distributions encompasses several important distributionseither as special or limiting cases, or through simple transformations. In this paper,we established the link between the real and the risk neutral distributions, andprovided a formal proof for the existence of the risk...

This analysis reveals the restricted scope of approaches which utilise arbitrage based arguments toprice contingent claims whose payoffs are determined by the outcome of non-zero-sum valuationgames between financial market participants. Many examples of such model formulations can befound, for...

This paper studies modelling and existence issues for market models of option prices in a continuous-time framework with one stock, one bond and a family of European call options for one fixed maturity and all strikes. After arguing that (classical) implied volatilities are ill-suited for...

In this study, we use both parametric and non-parametric methods to test the property of martingale restriction in KOSPI 200 index options market. Our results provide strong evidence that the property is violated. Further regression analysis and robustness checks suggest that market friction...

We propose a new algorithm which allows easy estimation of Vector Autoregressions (VARs) featuring asymmetric priors and time varying volatilities, even when the cross sectional dimension of the system N is particularly large. The algorithm is based on a simple triangularisation which allows to...

We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation...