A new methodology is proposed to estimate theortical prices of financial contingent-claims whose values are dependent on some other underlying financial assets. In the literature the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but is...

A new methodology is proposed to estimate theoretical prices of financial contin- gent claims whose values are dependent on some other underlying financial assets. In the literature, the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but...

We introduce Indirect Robust Generalized Method of Moments (IRGMM), a new simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it...

Aim of this article is to judge the empirical performance of 'ARCH models as diffusion approximations' of models of the short-term rate with stochastic volatility. Our estimation strategy is based both on moment conditions needed to guarantee the convergence of the discrete time models and on...

The objective of this paper is to evaluate option pricing performance on the cross sectional level. For this purpose, we propose a statistical framework, in which we in particular account for the uncertainty associated with the reported pricing performance. Instead of a single figure, we...

Ambiguity aversion in dynamic models is motivated by the presence of unknown time-varying features, which agents do not understand and cannot theorize about. We analyze the consequences of this assumption for economic agents and model builders, who typically need to estimate a model, e.g., to...

The Monte Carlo method is applied to various cases of financial option pricing. Its performance is satisfactory in terms of accuracy when it is compared to other numerical methods. The precision of the estimates provided by Crude Monte Carlo can be improved by implementing variance reduction...

We propose an approximate static hedging procedure for multivariate derivatives. The hedging portfolio is composed of statically held simple univariate options, optimally weighted minimizing the variance of the difference between the target claim and the approximate replicating portfolio. The...

Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for...

This paper presents a selective survey of volatility topics, with emphasis on the measurement of volatility and a discussion of some of the most important time series models commonly employed in its modelling. In particular, the paper details the long memory characteristics of volatility, and...