Close-to-zero interest rates challenge standard economic models in which zero lower bound (ZLB) is absent. We estimate a recursive utility model which features time-varying latent expected real growth, expected inflation, and stochastic inflation volatility. Using an approximate solution to bond...

Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging...

This paper provides a theoretical and numerical analysis of robust hedging strategies in diffusion?type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as the realised volatility stays within a given interval. We focus on the effects of...

When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution...

Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor...

The term 'financialization' describes the phenomenon that commodity contracts are traded for purely financial reasons and not for motives rooted in the real economy. Recently, financialization has been made responsible for causing adverse welfare effects especially for low-income and low-wealth...

Variance contracts permit the trading of ’variance risk’, i.e. the risk that the realizedvariance of stock returns changes randomly over time. We discuss why investorsmight want to trade this type of risk, and why they might prefer a variance contractto standard calls and puts for this...

The observed prices of out-of-the money put options seem too high given standardderivative pricing models. One possible explanation is a Peso problem: crashes (forwhich the payoff of a put is high) are taken into account for pricing, but are under-represented in the data sets used for empirical...

This paper analyzes the properties of and the differences between derivative pricingmodels that include stochastic volatility or stochastic jumps or both of these riskfactors. The focus is on the pricing of European options. In a first step, we discussthe impact of the parameters in stochastic...

The vast majority of approaches to risk management, hedging, or portfolio planningassume that some model is given. However, under model risk, the true data gener-ating process is not known. The focus of this paper is on problems related to thehedging of derivative contracts. We explain the main...