We propose a nonparametric Bayesian approach for the estimation of the pricing kernel. Historical stock returns and option market data are combined through the Dirichlet Process (DP) to construct an option-adjusted physical measure. The precision parameter of the DP process is calibrated to the...

Taking a portfolio perspective on option pricing and hedging, we show that within the standard Black-Scholes-Merton framework large portfolios of options can be hedged without risk in discrete time. The nature of the hedge portfolio in the limit of large portfolio size is substantially different...

Supported by empirical examples, this paper provides a theoretical analysis on the impacts of using a suboptimal information set for the estimation of the empirical pricing kernel and, more in general, for the validity of the fundamental theorems of asset pricing. While inferring the...

Numerous studies find S-shaped pricing kernels, which is conflicting with standard theory. In contrast to that, based on a novel GARCH model with structural breaks, I show that the pricing kernel is consistently U-shaped. The results are robust to variations in the methodology and hold for...

In this paper we propose a novel flexible framework based on time changed Lévy process for the joint evolution of stock log-returns and their volatility with the aim of analysing which risk factors and which distribution features provide a robust calibration, repricing and hedging performance....

Sellers of variance swaps earn time-varying risk premia for their exposure to realized variance, the level of variance swap rates, and the slope of the variance swap curve. To measure risk premia, we estimate a dynamic term structure model that decomposes variance swap rates into expected...

When investing in derivatives portfolios (such as options), the delta-gamma approximation (DGA) is often used as a risk management strategy to reduce the risk associated with the underlying asset price. However, this approximation is accepted only for small changes of the underlying asset price....

This research proposes a new option pricing model. The model revises the unimodal probability distribution assumption used in the past, and proposes a bimodal probability distribution for option pricing. The bimodal probability distribution proposed in this study can be degenerated to a unimodal...

Since the launch of 50 ETF index option in February 2015, its trading volume keeps increasing year by year. This reflects the strong potential of the Chinese option market. As there were few English research on the 50 ETF option, I was very interested in applying the Black-Scholes (BS) and...

We investigate the problem of calibrating an exponential Lévy model based on market prices of vanilla options. We show that this inverse problem is in general severely ill-posed and we derive exact minimax rates of convergence. The estimation procedure we propose is based on the explicit...