This paper (1) introduces a modified-Machlup (mM) assessment, as well as DQA and DQE concerns and a DQXY Thesis that tie the mM assessment to the Duhem-Quine (DQ) Thesis and theories of model validation (TMV), and then (2) applies the mM and DQA/DQE concepts to three archetypal models (i.e.,...

This paper develops a new top-down valuation framework that links the pricing of an option investment to its daily profit and loss attribution. The framework uses the Black-Merton-Scholes option pricing formula to attribute the short-term option investment risk to variations in the underlying...

Credit Default Swaps (CDS) on a reference entity may be traded in multiple currencies, in that protection upon default may be offered either in the domestic currency where the entity resides, or in a more liquid and global foreign currency. In this situation currency fluctuations clearly...

We develop a simple robust link between deep out-of-the-money American put options on a company's stock and a credit insurance contract on the company's bond. We assume that the stock price stays above a barrier B before default but drops below a lower barrier $A$ after default, thus generating...

We derive an equilibrium asset pricing model incorporating liquidity risk, derivative assets, and short-selling due to hedging of non-traded risk. We show that, both for positive-net-supply assets and derivatives, the sign of liquidity effects depends on investor heterogeneity in non-traded risk...

This paper estimates time-varying systematic downside risk using a parametric specification (BEKK model) and a nonparametric procedure (rolling window technique). A sample of Malaysian industry portfolio daily returns reveals that the covariance between portfolio excess returns and excess...

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte...

We present a new approach to identifying asset price bubbles based on options data. Given their forward-looking nature, options are ideal instruments with which to investigate market expectations about the future evolution of asset prices, which are key to understanding price bubbles. By...

Classical quantitative finance models such as the Geometric Brownian Motion or its later extensions such as local or stochastic volatility models do not make sense when seen from a physics-based perspective, as they are all equivalent to a negative mass oscillator with a noise. This paper...

This study provides a liquidity-supply side model of options markets for illustrating how options pricing uncertainty affects moment risk premia. The model is based on micro-structure theory such that a representative market maker dynamically replicates options prices, hedges risky positions,...