This article illustrates the impact of both spot and option liquidity levels on option prices. Using implied volatility to measure the option price structure, our empirical results reveal that even after controlling for the systematic risk of Duan and Wei (2009), a clear link remains between...

This paper uses a copula model to investigate the degree and determinants of European market dependence across 10 industries in 12 Euro zone and 8 non-Euro zone stock markets during the period 1992–2011. Most of the industries in Euro countries show a dependence increase with the Euro-area...

This paper derives a simple square root option pricing model (SSROPM) using a general equilibrium approach in an economy where the representative agent has a generalized logarithmic utility function. Our option pricing formulae, like the Black-Scholes model, do not depend on the preference...

We derive the theoretical relation between the term structure of implied variance and the expected excess returns of the underlying asset. Adopting three alternative approaches to compile the variables representing the information on the implied volatility index level and term structure, we show...

While numerous prior studies report that call–put implied volatility spreads positively predict future stock returns, recent literature shows that the predictive relation is negative for future call option returns. We investigate whether and, if so, how the predictive relation for options...

This study compares the volatility and density prediction performance of alternative GARCH models with different conditional distribution specifications. The conditional residuals are specified as normal, skewed-t or compound Poisson (jump) distribution based upon a non-linear and asymmetric...

The estimation of the cost of equity capital (COE) is one of the most important tasks in financial management. Existing approaches compute the COE using historical data, i.e. they are backward-looking methods. This paper derives a method to calculate forward-looking estimates of the COE using...

This study examines whether incorporating jumps with stochastic volatility can improve the predictive power of option-implied densities of the FTSE 100 index. A general double-jump model, as proposed by Duffie et al. (2000), is used to fit the market prices of options and to estimate...

This paper derives the pricing bounds of a currency cross-rate option using the option prices of two related dollar rates via a copula theory and presents the analytical properties of the bounds under the Gaussian framework. Our option pricing bounds are useful, because (1) they are general in...

We use, for the first time, a time-varying copula model to investigate the impact of the introduction of the Euro on the dependence between seventeen European stock markets during the period 1994-2003. The model is implemented with a GJR-GARCH-t model for the marginal distributions and the...