This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating...

We investigate predictive abilities of nonlinear models for stock returns when density forecasts are evaluated and compared instead of the conditional mean point forecasts. The aim of this paper is to show whether the in-sample evidence of strong nonlinearity in mean may be exploited for...

We introduce a novel and convenient approach to utility modeling. In doing so, we present a general utility function in a very simple exact form. Furthermore, we develop a method to (accurately) measure preferences without any utility data. We also devise a method to measure the marginal...

We prove that high simulated performance is easily achievable after backtesting a relatively small number of alternative strategy configurations, a practice we denote “backtest overfitting”. The higher the number of configurations tried, the greater is the probability that the backtest is...

Against the backdrop of interest rate risk in the fixed income portfolios of the financial institutions in India that arose since the first quarter of the current financial year 2008-09 the influence of monetary policy on the term structure emerged as an important issue for research purposes. In...

A growing literature analyzes the cross-section of single stock option returns, virtually always under the (implicit or explicit) assumption of a monotonically decreasing pricing kernel. Using option returns, we non-parametrically provide significant and robust evidence that the pricing kernel...

Harvey, Liu, and Zhu (2016) “argue that most claimed research findings in financial economics are likely false.” Surprisingly, their false discovery rate (FDR) estimates suggest most are true. I revisit their results by developing non- and semi-parametric FDR estimators that account for...

We propose two nonparametric transition density-based speciÞcation tests for continuous-time diffusion models. In contrast to marginal density as used in the literature, transition density can capture the full dynamics of a diffusion process, and in particular, can distinguish processes with...

Futures contracts on the New York Mercantile Exchange are the most liquid instruments for trading crude oil, which is the world’s most actively traded physical commodity. Under normal market conditions, traders can easily find counterparties for their trades, resulting in an efficient market...

In this paper we investigate whether stock market overpricing leads to aggregate (real) inefficiencies. We first investigate a standard dynamic contracting model of investment subject to financing constraints. We show that stock market mispricing will have two robust effects on welfare: on the...