We present a new option-pricing model, which explicitly captures the difference in the persistence of volatility under historical and risk-neutral probabilities. The model also allows to capture the empirical properties of pricing kernels, such as time-variation and the typical S-shape. We apply...

In this paper, we present effect of the liquidity on risky bonds pricing. The liquidity effect is represented by the adjustment to the single price format. We begin with bid-ask pricing format and it helps to observe effect of the liquidity on each step of pricing. In the first section, we...

The role of market jump risk premium implicit in individual equity options has not been examined to date. This paper develops a new factor model for equity returns and option pricing that takes into account the market's diffusive and jump risks. We estimate the model on a large cross section of...

All too often, the concept of risk-neutral probabilities in mathematical finance is poorly explained, and misleading statements are made. The aim of this paper is to provide an intuitive understanding of risk-neutral probabilities, and to explain in an easily accessible manner how they can be...

The analytic method of Chen, Cosimano, and Himonas (CCH 2009) is extended to prove that the continuous time version of the long run risk model of Bansal and Yaron (2004) has an analytic solution. The long run risk model is dependent on the recursive utility introduced by Duffie and Epstein...

The term structure of equity risk has been shown to be downward sloping. We capture this feature using return dynamics driven by both a transitory and a permanent component. We study the asset allocation and portfolio performance when transitory and permanent components cannot be observed and...

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high...

The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We propose new and simple financial...

Under Black-Scholes (BS) assumptions, empirical volatility and risk neutral volatility are given by a single parameter, which captures all aspects of risk. Inverting the model to extract implied volatility from an option's market price gives the market's forecast of future empirical volatility....