It is often difficult to distinguish among different option pricing models that consider stochastic volatility and/or jumps based on a cross-section of European option prices. This can result in model misspecification. We analyze the hedging error induced by model misspecification and show that...

There is empirical evidence that the implied volatility smile for index options is significantly steeper than the smile for individual options. We propose a simple model setup that is able to explain this difference. When modelling the index, an aggregation restriction has to be taken into...

This paper deals with the problem of determining the correct beta for options in a Black-Scholes (BS) framework. For the purpose of testing simple asset pricing relationships previous papers used the 'local' BS beta as the measure of systematic option risk even over return intervals of discrete...

The paper analyzes expected option returns in models with stochastic volatility and jumps. A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider...

The paper analyzes expected option returns in models with stochastic volatility and jumps. A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider...

Directed links in cash flow networks a↵ect the cross-section of risk premia through three channels. In a tractable consumption-based equilibrium asset pricing model, we obtain closed-form solutions that disentangle these channels for arbitrary directed networks. First, shocks that can...