Implied volatility (IV) reflects both expected empirical volatility and also risk premia. Stochastic variation in either creates unhedged risk in a delta hedged options position. We develop EGARCH/DCC models for the dynamics of volatilities and correlations among daily IVs from options on 28...

The Federal Reserve announces its new interest rate target while the stock market is open, at precisely 2:15 P.M. eight times a year. In the Efficient Markets model, information is impounded in prices immediately and accurately as soon as it becomes public knowledge and only the unanticipated...

We examine how the risk neutral probability density (RND) for the S&P 500 behaved from minute to minute during the fall of 2008, compared to earlier periods. The RND extracted from a new dataset containing the full real-time record of bid and ask quotes for index options provides an...

The market's risk neutral probability distribution for the value of an asset on a future date can be extracted from the prices of a set of options that mature on that date, but two key technical problems arise. In order to obtain a full well-behaved density, the option market prices must be...

Option valuation models are based on an arbitrage strategy--hedging the option against the underlying asset and rebalancing continuously until expiration--that is only possible in a frictionless market. This paper simulates the impact of market imperfections and other problems with the...