We begin with an overview of classical theories and empirical methods for option pricing and hedging without transaction costs, and then with a brief review of developments in the corresponding theory when there are transaction costs. An interesting feature of the optimal hedging strategy in the...

This paper describes a new approach to time series modeling that combines subject-matter knowledge of the system dynamics with statistical techniques in time series analysis and regression. Applications to American option pricing and the Canadian lynx data are given to illustrate this approach.