This paper empirically examines whether asset’s liquidity can help resolve the known strike-price biases of the Black-Scholes model for different liquidity measures based on trading volume, bid-ask spread and the Amihud’s ILLIQ. Our results indicate that, when the underlying asset...

A barrier option is a financial derivative which includes an activation (or deactivation) clause within a standard vanilla option. For instance, a copper mining company could secure to sell in at least K dollars each ton of copper during the next year, by buying M European put options. However,...

This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage...

The purpose of this paper is to introduce a stochastic volatility model for option pricing that exhibits Lévy jump behavior. For this model, we derive the general formula for a European call option. A well known particular case of this class of models is the Bates model, for which the jumps are...

In this study, we use both parametric and non-parametric methods to test the property of martingale restriction in KOSPI 200 index options market. Our results provide strong evidence that the property is violated. Further regression analysis and robustness checks suggest that market friction...

The paper proposes a general asymmetric multifactor Wishart stochastic volatility (AMWSV) diusion process which accommodates leverage, feedback efects and multifactor for the covariance process. The paper gives the closed-form solution for the conditional and unconditional Laplace transform of...

In this article, we study the effects on derivative pricing arising from price impacts by large traders. When a large trader issues a derivative and (partially) hedges his risk by trading in the underlying, he influences both his hedge portfolio and the derivative's payoff. In a Black–Scholes...

Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under...

This paper determines the value of asset tradeability in an option pricing framework. In our model, tradeability is valuable since it allows investors to exploit temporary mis-pricings of stocks. The model delivers several novel insights on the value of tradeability: The value of tradeability is...

The art market has seen boom and bust during the last years and, despite the downturn, has received more attention from investors given the low interest environment following the financial crisis. However, participation has been reserved for a few investors and the hedging of exposures remains...