In recent years, a liquid market for options on a broad credit default swap index (CDX) has developed. We study the extent to which these options are priced consistently with options on a broad equity index (SPX). We consider a rich structural credit risk model in which firm assets follow a...

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic...

This paper introduces a new technique to infer the risk-neutral probability distribution of an asset from the prices of options on this asset. The technique is based on using the trading volume of each option as a proxy of the informativeness of the option. Not requiring the implied probability...

A discrete time model of financial markets is considered. It is assumed that the stock price evolution is described by a homogeneous Markov chain. In the focus of attention is the expected value of the guaranteed profit of the investor that arises when the jumps of the stock price are bounded....

A discrete time model of financial markets is considered. It is assumed that the relative jumps of the risky security price are independent non-identically distributed random variables. In the focus of attention is the expected non-risky profit of the investor that arises when the jumps of the...

The mainstream model of option pricing is based on an exogenously given process of price movements. The implication of this assumption is that price movements are not affected by actions of market participants. However, if we assume that there are indeed impacts on the price movements it no...

We focus on closed-form option pricing in Heston's stochastic volatility model, in which closed-form formulas exist only for few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this approach and derive multivariate characteristic...

We derive a semi-analytical formula for pricing forward-start options in the Barndorff-Nielsen- Shephard model. In terms of computational time, this formula is equivalent to one-dimensional integration.

When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest...

This paper compares the performance of three methods for pricing vanilla options in models with known characteristic function: (1) Direct integration, (2) Fast Fourier Transform (FFT), (3) Fractional FFT. The most important application of this comparison is the choice of the fastest method for...