This paper proposes a novel nonparametric method to recover the implied risk-neutral density (RND) from option prices. The main advantages of this method are that it 1) is almost completely agnostic about the true underlying process, 2) controls against overfitting while allowing for small...

The notion of model-free implied volatility (MFIV), constituting the basis for the highly publicized VIX volatility index, can be hard to measure with accuracy due to the lack of precise prices for options with strikes in the tails of the return distribution. This is reflected in practice as the...

We document a transaction level invariance relation among concurrent activity variables in the S&P 500 futures market: return volatility per transaction is proportional to the inverse of the squared expected trade size. It captures the time series behavior extremely well. Even more strikingly,...

This paper studies the quot;overpriced puts puzzle'' -- the finding that historical prices of the Samp;P 500 put options have been too high and incompatible with the canonical asset-pricing models, such as CAPM and Rubinstein (1976) model. To investigate whether put returns could be rationalized...

This paper proposes a new nonparametric method for estimating the conditional risk-neutral density (RND) from a cross-section of option prices. The idea of the method is to fit option prices by finding the optimal density in a special admissible set. The admissible set consists of functions,...

This paper introduces the concept of a statistical arbitrage opportunity (SAO). In a finite-horizon economy, an SAO is a zero-cost trading strategy for which i) the expected payoff is positive, and ii) the conditional expected payoff in each final state of the economy is nonnegative. Unlike a...

This paper develops a dynamic market microstructure model of liquidity provision in which M strategic market makers compete in price schedules for order flow from informed and uninformed traders. In equilibrium, market makers post price schedules that are steeper than efficient ones, and the...

We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the evolution of the volatility surface....

Following the much publicized "flash crash" in the U.S. financial markets on May 6, 2010, much work has been done in terms of developing reliable warning signals for impending market stress. However, this has met with limited success, except for one measure. The VPIN, or Volume-synchronized...

We present a generalization of Cochrane and Saá-Requejo's good-deal bounds which allows to include in a flexible way the implications of a given stochastic discount factor model. Furthermore, a useful application to stochastic volatility models of option pricing is provided where closed-form...