We develop a simple robust test for the presence of continuous and discontinuous (jump) components in the price of an asset underlying an option. Our test examines the prices of at-the-money and out-of-the-money options as the option maturity approaches zero. We show that these prices converge...

We consider the hedging of derivative securities when the price movement of the underlying asset can exhibit random jumps. Under a one factor Markovian setting, we derive a spanning relation between a long term option and a continuum of short term options. We then apply this spanning relation to...

We test a theory that provides a simple and robust linkage between the market prices of credit default swaps (CDS) and far out-of-the-money equity American put options on the same reference company. The linkage is established under a general class of stock price dynamics. We assume that the...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...

We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Poisson process with a stochastic default arrival rate. When default occurs, the stock...

Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance...

We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that on any given date, the conditional risk-neutral distribution of currency returns can show...

In 1993, the Chicago Board of Options Exchange (CBOE) introduced the CBOE Volatility Index. This index has become the de facto benchmark for stock market volatility. On September 22, 2003, the CBOE revamped the definition and calculation of the volatility index, and back-calculated the new index...

We document a surprising pattern in Samp;P 500 option prices. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sharply with the...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. We propose to use...