We investigate the effect of including variance derivatives as calibration and hedging instruments for pricing and hedging exotic structures. This is studied empirically using market data for SPX and VIX derivatives applied in a stochastic volatility jump diffusion model

Risk premia are related to price probability ratios or for continuous time pure jump processes the ratios of jump arrival rates under the pricing and physical measures. The variance gamma model is employed to synthesize densities with risk premia seen as the ratio of the three parameters. The...

We propose a parsimonious general equilibrium extension of the Black-Scholes economy that helps clarify how options' prices, expected returns, risk exposure, and optimal exercise policies respond to variations in the risk exposure of the underlying asset. The model allows one to separate the...

Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate risk-neutral distribution...

We investigate the effects of return jumps on option bid-ask spreads measured in implied volatility. To explain bid-ask spread quoting behavior, we construct a general model with market makers trading in an incomplete market in which a Bernoulli-type jump could occur. Following a numerical...

This paper presents a new robust predictor for option returns: the uncertainty of put-call parity violation (VVS). We find that the delta-hedged equity option return decreases monotonically with VVS. Although VVS is highly correlated with the classical uncertainty and limit-to-arbitrage...

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We...

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

We study the pricing of contracts in fixed income markets in the presence of volatility uncertainty. We consider an arbitrage-free bond market under volatility uncertainty. The uncertainty about the volatility is modeled by a G-Brownian motion, which drives the forward rate dynamics. The absence...