We consider the option value of cash when nominal interest rates are no longer constrained by the zero lower bound. We provide a general valuation principle and solve for the value of cash in semi-closed form under Vasicek (1977) dynamics for the nominal short rate. In the absence of a zero...

In this work we want to provide a general principle to evaluate the CVA (Credit Value Adjustment) for a vulnerable option, that is an option subject to some default event, concerning the solvability of the issuer. CVA is needed to evaluate correctly the contract and it is particularly important...

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We...

Loss functions are widely used to calibrate option pricing models to cross-sectional derivatives quotes. However, these approaches come with the disadvantage that estimated model parameters often appear to lack stability over time. On small option markets, this sign of over-fitting is typically...

The selection of an appropriate parameterization of data is a fundamental step in a majority of empirical research effort. Likewise, detecting or estimating features of non-stationarities in data sequences is a critical point in conducting credible research that uses data for inference. In this...

We embed systematic default, pro-cyclical recovery rates and habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to...

We provide an easy-to-use model that values derivatives for a privately informed agent. We introduce private forward prices that conveniently format private information for inclusion in a standard no-arbitrage framework. This framework yields simple expressions for the privately-informed value...

Cross-market deviations in equity put option prices and credit default swap spreads are temporal and revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves predictable and economically significant changes also in the equity...

We provide first-time evidence of the real-time characteristics and drivers of jumps in option prices. To this end, we employ high-frequency data from the 24-hour E-mini S&P 500 options market. We find that option prices do not jump simultaneously across strikes and maturities and are...

In this paper, we investigate a two-factor VIX model with infinite-activity jumps, which is a more realistic way to reduce errors in pricing VIX derivatives, compared with Mencía and Sentana (2013). Our two-factor model features central tendency, stochastic volatility and infinite-activity pure...