This paper presents the first comparison of the accuracy of density forecasts for stock prices. Six sets of forecasts are evaluated for DJIA stocks, across four forecast horizons. Two forecasts are risk-neutral densities implied by the Black-Scholes and Heston models. The third set are...

Recent general equilibrium models prescribe predictable dynamics in the volatility surfaces that are implied by observed option prices. In this paper we investigate the predictability of surfaces, using extensive time series of implied volatilities from over-the-counter options on eight...

Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under...

In this paper we explore the dynamics of Implied Volatility Surfaces (IVS) both in a single-currency framework, and in the context of a global, integrated market. We construct a parametric function of “moneyness” and “time-to-maturity” factors that correspond to common shapes of IVS with...

Market option prices in last 20 years confirmed deviations from the Black and Scholes (BS) models assumptions, especially on the BS implied volatility. Implied binomial trees (IBT) models capture the variations of the implied volatility known as "volatility smile". They provide a discrete...

We develop a discrete-time stochastic volatility option pricing model, which exploits the information contained in high-frequency data. The Realized Volatility (RV) is used as a proxy of the unobservable log-returns volatility. We model its dynamics by a simple but effective (pseudo) long memory...

Observing prices of European put and call options, we calibrate exponential Lévy models nonparametrically. We discuss the implementation of the spectral estimation procedures for Lévy models of finite jump activity as well as for self-decomposable Lévy models and improve these methods....

The Markov Tree model is a discrete-time option pricing model that accounts for short-term memory of the underlying asset. In this work, we compare the empirical performance of the Markov Tree model against that of the Black-Scholes model and Heston's stochastic volatility model. Leveraging a...

In this paper we derive a market value for Guaranteed Annuity Optionusing martingale modeling techniques. Furthermore, we show how to construct a static replicating portfolio of vanillainterest rate swaptions that replicates the Guaranteed Annuity Option. Finally, we illustrate with historical...

Over-allotment arrangements are nowadays part of almost any initial public offering. The underwriting banks borrow stocks from the previous shareholders to issue more than the initially announced number of shares. This is combined with the option to cover this short position at the issue price....