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

We employ a refined tree method to value employee stock options (ESOs) in the stochastic volatility model of Heston. Our setting covers risk-averse employees maximizing expected utility where we in particular focus on subjective option valuation, personal market beliefs and stochastic...

We examine the pricing of volatility risk in the cross-section of equity Real Estate Investment Trust (REIT) stock returns over the 1996 – 2010 period. We consider both aggregate (systematic) volatility and firm-specific (idiosyncratic) volatility. In contrast to the negative and significant...

Speculators who wish to bet on higher future volatility often purchase options to “go long volatility.” Should investors who buy options expect to profit when realized volatility increases? If so, under what conditions? To answer these questions, we conduct an analysis of the relationship...

We derive a model-free option-based formula to estimate the contribution of market frictions to expected returns (CFER) within an asset pricing setting. We estimate CFER for the U.S. optionable stocks. We document that CFER is sizable, it predicts stock returns and it subsumes the effect of...

We construct a derivative that depends on the SPY and VIX and, in this way, incorporates both the market risk premium and the variance risk premium. We show that the product's Sharpe ratio is higher than the SPY Sharpe ratio. If we invest $10000 into the product, the products' payoff is around...

We develop statistics to represent the option implied stochastic discount factor for S&P 500 returns between 1990 and 2008. Our statistics, which we call State Prices of Conditional Quantiles (SPOCQ), estimate the market's willingness to pay for insurance against outcomes in various quantiles of...

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993-2011 to empirically analyze the behaviour of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between...

We develop approximate formulae expressed in terms of elementary functions for the density, the price and the Greeks of path dependent options of Asian style, in a general local volatility model. An algorithm for computing higher order approximations is provided. The proof is based on a heat...

We present a simplified approach to the analytical approximation of the transition density related to a general local volatility model. The methodology is sufficiently flexible to be extended to time-dependent coefficients, multi-dimensional stochastic volatility models, degenerate parabolic...