We propose and study a flexible modeling framework for the joint dynamics of an index and a set of forward variance swap rates written on this index, allowing options on forward variance swaps and options on the underlying index to be priced consistently. Our model reproduces various empirically...

Time series of financial asset returns often exhibit the volatility clustering property: large changes in prices tend to cluster together, resulting in persistence of the amplitudes of price changes. After recalling various methods for quantifying and modeling this phenomenon, we discuss several...

We introduce an alternative approach for computing the values of CDO tranche spreads in reduced-form models for portfolio credit derivatives (quot;top-downquot; models), which allows for efficient computations and can be used as an ingredient of an efficient calibration algorithm. Our approach...

Constant proportion portfolio insurance (CPPI) allows an investor to limit downside risk while retaining some upside potential by maintaining an exposure to risky assets equal to a constant multiple of the quot;cushion,quot; the difference between the current portfolio value and the guaranteed...

We propose a probabilistic approach for estimating parameters of an option pricing model from a set of observed option prices. Our approach is based on a stochastic optimization algorithm which generates a random sample from the set of global minima of the in-sample pricing error and allows for...

Uncertainty on the choice of an option pricing model can lead to quot;model riskquot; in the valuation of portfolios of options. After discussing someproperties which a quantitative measure of model uncertainty should verify in order to be useful and relevant in the context of risk management of...

We present a finite difference method for solving parabolic partial integro-differential equations with possibly singular kernels which arise in option pricing theory when the random evolution of the underlying asset is driven by a Levy process or, more generally, a time-inhomogeneous...

Motivated by stylized statistical properties of interest rates, we propose a modeling approach in which the forward rate curve is described as a stochastic process in a space of curves. After decomposing the movements of the term structure into the variations of the short rate, the long rate and...

Options markets offer an interesting example of the adaptation of a population to a complex environment, through trial and error and by 'natural' selection. Guided by the Black-Scholes theory but constrained by the fact that mispricing leads to arbitrage opportunities, options markets agree on...

This paper reviews various methods for extracting statistical information implicit in market prices of options. We present several methods for state price densities from options paneldata: lognormal Edgeworth expansions, cumulant expansions, Hermite polynomial expansions, non-parametric...