The pricing kernel puzzle of Jackwerth (2000) concerns the fact that the empirical pricing kernel implied in S&P 500 index options and index returns is not monotonically decreasing in wealth as standard economic theory would suggest. Thus, those options are currently priced in a way such that...

How do stock prices evolve over time? The standard assumption of geometric Brownian motion, questionable as it has been right along, is even more doubtful in light of the stock market crash of 1987 and the subsequent prices of U.S. index options. With the development of rich and deep markets in...

We investigate incentive effects of a typical hedge-fund contract for a manager with power utility. With a one-year horizon, she displays risk-taking that varies ramatically with fund value. We extend the model to multiple yearly evaluation periods and find her risk-taking is rapidly moderated...

A relationship exists between aggregate risk-neutral and subjective probaility distributions and risk aversion functions. We empirically derive risk aversion functions implied by option prices and realized returns on the S&P 500 index simultaneously. These risk aversion functions dramatically...

In this selective literature review, we start by observing that in efficient markets, there is information incorporated in option prices that might help us to design option pricing models. To this end, we review the numerous methods of recovering risk-neutral probability distributions from...

We consider the problem of consistently pricing new options given the prices of related options on the same stock. The Black-Scholes formula and standard binomial trees can only accommodate one related European option which then effectively specifies the volatility parameter. Implied binomial...

Murphy, Koehler, and Fogler [1997] gave in the last issue of the Journal of Portfolio Management an account of how to raise a neural net’s IQ. The purpose of this reply is to point out some of the general difficulties with neural nets. Also, I would like to mention an alternative method, namely...

American call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid...

Analysts are accustomed to using prices for the information they contain. A stock price, for example, can be thought of as an expected value of future cash flows. Each futures price and option price tells the analyst a bit more about the probability distribution under which those expectations...

The volatility smile changed drastically around the crash of 1987 and new option pricing models have been proposed in order to accommodate that change. Deterministic volatility models allow for more flexible volatility surfaces but refrain from introducing additional risk-factors. Thus, options...