How do financial markets switch from states of optimism to pessimism and vice versa? Given that a financial market is currently stable, what is the probability that it will become unstable and crash? We answer those questions in the context of a natural experiment with risk sources of...

The asset allocation decision often relies upon correlation estimates arising from short-run data. Short-run correlation estimates may, however, be distorted by frictions. In this paper, we introduce a long-run wavelet-based correlation estimator, distinguishing between long-run common behavior...

An "explosion moment" is a large movement in the market that can be caused by fundamental changes or the normal dynamic of some assets. These movements can be difficult to navigate and can lead to poor investment decisions. There are two types of events that can cause explosion moments:...

In this paper, we propose an innovative VIX model which takes future market information available to the traders into account. The future information is modeled by an initially enlarged filtration in our setup. We derive an explicit representation for the anticipative VIX process and obtain the...

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 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...

Firm Profitability - Does it really matter for shareholder return or ROE (return on equity)? Does this question sound oxymoron and antithetic? Not really. On the contrary, evidence has surfaced that Returns on equity - based on the shareholders' equity accounted in the balance sheet - is not...

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 introduce a dynamic noisy rational expectations model in which information diffuses through a general network of agents. In equilibrium, agents who are more closely connected have more similar period-by-period trades, and an agent's profitability is determined by a centrality measure that is...