I develop a noisy rational expectations equilibrium model with a continuum of states and a full set of options that render the market complete. I show a major difference in equilibrium behaviour between models with constant absolute risk aversion (CARA) and non-CARA preferences. First, when...

We examine whether the option market leads the stock market with respect to positive in addition to negative price discovery. We document that out-of-themoney (OTM) option prices, which determine the Risk-Neutral Skewness (RNS) of the underlying stock return's distribution, can embed positive...

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...

We explore the pricing performance of Support Vector Regression for pricing S&P 500 index call options. Support Vector Regression is a novel nonparametric methodology that has been developed in the context of statistical learning theory and until now it has been practically neglected in...

An exercise boundary violation (EBV) occurs when the current bid price for an American option in the market is below intrinsic value. A seller at this price leaves money on the table and the buyer receives an arbitrage profit. In a liquid market, competition among dealers should drive up the bid...

We derive the theoretical relation between the term structure of implied variance and the expected excess returns of the underlying asset. Adopting three alternative approaches to compile the variables representing the information on the implied volatility index level and term structure, we show...

This article explores the role of the realized return distribution in the formation of the observed implied volatility smile using the framework of an adaptive expectations model. According to this framework investors update their expectations of future events, through which options are priced,...

We compile option-implied tail loss and gain measures based on a deep out-of-the- money option pricing formula derived by applying ‘extreme value theory', and then use these measures to investigate the information content of option-implied tail risk on the future returns of the underlying...

This paper develops a lattice method for option evaluation in the presence of regime shifts in the correlation structure of assets, aiming at investigating whether the option prices reflect such shifts. Specifically we try to investigate whether option prices reflect switches in the correlation...