Option prices vary with not only the underlying asset price, but also volatilities and higher moments. In this paper, we use a portfolio of options to seclude the value change of the portfolio from the impact of volatility and higher moments. We apply this portfolio approach to the price...

This article analyzes the specifications of option pricing models based on time-changed Levy processes. We classify option pricing models based on (i) the structure of the jump component in the underlying return process, (ii) the source of stochastic volatility, and (iii) the specification of...

This paper analyzes the optimal dynamic asset allocation problem in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical approximations are obtained, with which a thorough comparative study is performed on the impacts of jumps upon...

We consider the patterns in the predictability of interest rates expectations hypothesis (EH), and attempt to account for them with affine models. We make the following points: (i) Discrepancies in the data from the EH take a particularly simple form with forward rates: as theory suggests, the...

We extract two systematic economic factors from a wide array of noisy and sparsely observed macroeconomic releases, and link the dynamics and market prices of the two factors to the interest rate term structure. The two factors predict 77.9-82.1% of the daily variation in LIBOR and swap rates...

The Federal Reserve adjusts the federal funds target rate discretely, causing discontinuity in short-term interest rates. Unlike Poisson jumps, these adjustments are well anticipated by the market. We propose a term structure model that incorporates an anticipated jump component with known...

This article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices. The model is based on a pure jump Lévy process, wherein the jump arrival rate obeys a power law dampened by an exponential function. The model allows...