This paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments. For the incomplete-markets case, we use consumption data for the 50 US states. We find that the rate of risk aversion under the...

We propose no-arbitrage term structure models in which the volatility factors followGARCH processes. The models’ tractability is similar to that of canonical affine termstructure models, but they capture the conditional variances of yields much more accurately.We estimate a model with one...

We model the impact of supply and demand on risk premiums in electricity futures, using daily data for 2003-2014. The model provides a satisfactory fit and allows for unspanned economic risk not embedded in the futures price. The spot risk premium and forward bias implied by the model are on...

We develop a GARCH option model with a variance premium by combining the Heston-Nandi (2000) dynamic with a new pricing kernel that nests Rubinstein (1976) and Brennan (1979). While the pricing kernel is monotonic in the stock return and in variance, its projection onto the stock return is...

Options on crude oil futures are the most actively traded commodity options. We develop a class of computationally efficient discrete-time jump models that allow for closed-form option valuation, and we use crude oil futures and options data to investigate the economic importance of jumps and...

Consistent with models in which intermediaries absorb net demand pressure from end-users and respond by changing prices, net option demand is positively related to option prices in the market for VIX puts and VIX calls. These findings are consistent with existing results for S&P 500 index (SPX)...

Characterizing asset return dynamics using GARCH models is an important part of empirical finance. The existing literature favors some rather complex volatility specifications whose relative performance is usually assessed through their likelihood based on a time-series of asset returns. This...

Both large oil price increases and decreases are associated with deteriorating economic conditions. Consistent with this stylized fact, we find that the projection of the state price density (SPD) on oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because...

We build a new class of discrete time models where the distribution of daily returns is driven by two factors: dynamic volatility and dynamic jump intensity. Each factor has its own risk premium. The likelihood function for the models is available using analytical filtering, which makes them...

Most recent empirical option valuation studies build on the affine square root (SQR) stochastic volatility model. The SQR model is a convenient choice, because it yields closed-form solutions for option prices. However, relatively little is known about the resulting biases. We investigate...