We propose a semiparametric single-factor diffusion model for the term structure of interest rate. The model is highly flexible and encompasses most parametric single-factor models proposed in the literature. We fit the semiparametric model to a proxy of the Eurodollar short term interst rate...

This paper presents a new formalism to price European options in all asset classes that fits the market data remarkably well. We use a model-independent representation of European Option prices as path integrals over all of the underlying asset price from inception to maturity. The no arbitrage...

The aim of this paper is to determine whether forward-looking option-implied returns forecasts lead to better out-of-sample portfolio performance than conventional time series models. We consider a simple two-asset setting with a risk-free asset and the S&P 500 index the risky asset with monthly...

In this paper we solve the discrete time mean-variance hedging problem when asset returns follow a multivariate autoregressive hidden Markov model. Time dependent volatility and serial dependence are well established properties of financial time series and our model covers both. To illustrate...

This paper presents the first comparison of the accuracy of density forecasts for stock prices. Six sets of forecasts are evaluated for DJIA stocks, across four forecast horizons. Two forecasts are risk-neutral densities implied by the Black-Scholes and Heston models. The third set are...

We address a very topical – and to some extent, intractable – question: When should I hedge? By analysing South African historical market returns, we show that only a handful of extreme returns – which are well characterised by two simple quantitative indicators – can have a significant...

A common feature of financial time series is their strong persistence. Yet, long memory may just be the spurious effect of either structural breaks or slow switching regimes. So far, five testing procedures have been proposed to distinguish between true and spurious long memory. The tests are...

This paper examines the in- and out-of-sample performance of various value-at-risk (VaR) approaches for commodity futures investments: conventional VaR, the Cornish-Fisher (CF) VaR, GARCH-type VaR models, and semi-parametric conditional autoregressive value-at-risk (CAViaR) models, which do not...

Diffusion functions in term-structure models are measures of uncertainty about future price movements and are directly related to the risk associated with holding financial securities. Correct specification of diffusion functions is crucial in pricing options and other derivative securities. In...

We compare density forecasts of the Samp;P 500 index from 1991 to 2004, obtained from option prices and daily and five-minute index returns. Risk-neutral densities are given by using option prices to estimate diffusion and jump-diffusion processes, that incorporate stochastic volatility, and...