We model the S&P500 index options dynamics using the CGMY distribution, with independent "up" and "down" return jumps, and diffusive jump intensities. Allowing the up and down parts to be separately parameterised accounts for the dynamic smirk effect, without correlation between returns and...

It is natural to assume that interest rates mean-revert, and natural consequence of this is that long forward rates are asymptotically constant. However, from US Treasury STRIPs data, forward rates slope increasingly downwards, and do not attenuate in volatility, as maturity increases beyond...

We study a continuous time model of a levered firm with fixed assets generating a cash flow which fluctuates with business conditions. Since external finance is costly, the firm holds a liquid (cash) reserve to help survive periods of poor business conditions. Holding liquid assets inside the...

It is natural to assume that interest rates mean-revert, and natural consequence of this is that long forward rates are asymptotically constant. However, from US Treasury STRIPs data, forward rates slope increasingly downwards, and do not attenuate in volatility, as maturity increases beyond...

We construct portfolios of Samp;P500 futures and their associated options, which are Delta (price) and Vega (volatility) neutral. These systematically earn negative abnormal returns, and suggest that out of the money puts are too expensive, relative to out of the money calls. We give evidence...

Since its introduction in 1973, the Black-Scholes model has found increasingly more resistance in application. In order to use Black-Scholes to price any option, one needs to know the implied volatility surface. The existence of such surface is an evidence of misspecification of the model. In...

Distantly maturing forward rates represent the markets long term (risk neutral) expectations about interest rates. As such, they are the fundamental ingredient of the pricing kernel. In most equilibrium models, interest rates mean revert, and long forward rates are asymptotically...

This paper first designs an efficient procedure to value Credit Default Swap Index tranches using an intensity-based model. The tranche spreads are effectively explained by a three-factor version of this model, both before and during the financial crisis of 2008. We then construct tradable...

We develop and estimate a Q-Theory style dynamic model of the firm's liquidity reserve and capital structure. The model features financial constraints, finite maturity debt, and growth limited by convex costs. We apply the model to obtain the following: 1. We suggest a resolution of the puzzle,...

The CME Nikkei 225 quot;Quantoquot; futures contract settles against the Nikkei Index but taken to refer to US dollars. This is intended for the convenience of US investors wanting to take exposure to the Japanese Market. In contrast, the corresponding quot;Vanillaquot; instruments trading on...