Recent work by Engle and Lee (1999) shows that allowing for long-run and short-run components greatly enhances a GARCH model's ability fit daily equity return dynamics. Using the risk-neutralization in Duan (1995), we assess the option valuation performance of the Engle-Lee model and compare it...

Recent work by Engle and Lee (1999) shows that allowing for long-run and short-run components greatly enhances a GARCH model's ability to fit daily equity return dynamics. Using the risk-neutralization in Duan (1995), we assess the option valuation performance of the Engle-Lee model and compare...

Using no arbitrage principle, we derive a relationship between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance curve. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we...

VIX futures are exchange-traded contracts on a future volatility index level (VIX) derived from a basket of SPX stock index options. The paper posits a stochastic variance model of VIX time evolution, and develops an expression for VIX futures. Free parameters are estimated from market data over...

This paper presents a new model for the valuation of European options, in which the volatility of returns consists of two components. One is a long-run component and can be modeled as fully persistent. The other is short-run and has a zero mean. Our model can be viewed as an affine version of...

This paper presents a new model for the valuation of European options, in which the volatility of returns consists of two components. One of these components is a long-run component, and it can be modeled as fully persistent. The other component is short-run and has a zero mean. Our model can be...