Due to the near unit-root behavior of interest rates, the movements of individual interest-rate series are inherently difficult to forecast. In this paper, we propose an innovative way of applying dynamic term structure models to forecast interest-rate movements. Instead of directly forecasting...

This paper analyzes one potential source of misspecification of existing models of the short-term interest rate and introduces a new class of discrete-time econometric specifications that nests many existing interest rate models as special cases. In existing continuous-time or time-series...

This paper compares the empirical performance of a wide variety of well-known diffusion models - with particular emphasis on the Black, Derman, and Toy (1990) term structure model - in capturing the dynamic behavior of interest rate volatility. Many popular models are nested within a more...

I introduce two-factor discrete time stochastic volatility models of the short-term interest rate to compare the relative performance of existing and alternative empirical specifications. I develop a nonlinear asymmetric framework that allows for comparisons of non-nested models featuring...

Drawing upon more than 12 million observations over the period from 1996 to 2020, we find that allowing for nonlinearities significantly increases the out-of-sample performance of option and stock characteristics in predicting future option returns. Besides statistical significance, the...

Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decile portfolios by past call...

We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns...

This paper shows that firm growth potential – representing a firm's yet-unexercised growth opportunities – is associated with option overpricing and low future delta-hedged option returns. We provide an explanation of this phenomenon based on the idea that retail investors exert buying...

This paper proposes alternative specifications of the conditional CAPM with dynamic conditional beta and tests the models' performance in explaining the value premium for the period 1963-2011. The conditional alphas on the value-minus-growth portfolio are estimated to be economically and...

We investigate the cross-sectional return predictability of delta-hedged equity options using machine learning and big data. Drawing upon more than 12 million observations over the period from 1996 to 2020, we find that allowing for nonlinearities significantly increases the out-of-sample...