From various empirical work, it is well known that the volatility of asset returns changes over time. This might be one of the reasons that implied volatilities differ for options that only differ in time to maturity. We construct models for the relation between short- and long-term implied...

This paper studies empirical issues of one-factor yield curve models. We focus on the models by Ho

In this paper, we consider the problem of hedging a contingent claim on a stock under transaction-costs and stochastic volatility. Extensive research during the last two decades has clearly demonstrated that the volatility of most stocks is not constant over time. Writers of over-the-counter...

We test whether liquidity is priced in the euro-denominated corporate bond market. We use the Arbitrage Pricing Theory to control for other sources of risk. Yields are used to measure the bonds' expected returns and liquidity is approximated by four indirect measures: issued amount, age, number...

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for...