We present a new discrete-time GARCH jump framework that allows for rich dynamics in higher moments by combining heteroskedastic processes with fat-tailed innovations in returns and volatility. We provide a tractable risk neutralization framework allowing for option valuation with separate...

This paper evaluates the underperformance of individual equity options relative to their replicating portfolios. Considering a high-dimensional set of variables, we use a machine learning approach to identify the characteristics of options and their underlying stocks that provide incremental...

We document a political risk premium of about 0.30% per month in the equity option market. High-political risk firms exhibit delta-hedged returns that are significantly lower than those of low-political risk firms. The effect holds both in a cross-sectional and in a time-series context. A...

We develop a new theory of asset return and volatility based on the stable law and Lihn's former work on the lambda distribution. The accomplishments are twofold: First, the newly discovered stable count distribution models the stationary distribution of VIX with high statistical precision....

Ex ante (expected) average equity market correlation is linked to the differential correlation dynamics of growth and value firms, as well as the value premium. It predicts returns on the value factor, returns of growth firms, and the changes in growth options within an economy for horizons up...

We study the relation between option-implied skewness (IS) and the cross-section of option returns under daily hedging to better understand the pricing of skewness in isolation from lower moments. Creating portfolios of delta-hedged (D-hedged) and delta-vega-hedged (DV-hedged) options with daily...

This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is...

In the data, out-of-the-money (OTM) S&P 500 call and put options both have puzzling low average returns. Existing studies relate these results to models with non-standard preferences. We argue that the low returns on OTM index options are primarily due to the pricing of market volatility risk....

We document that a theoretically founded, real-time, and easy-to-implement option-based measure, termed synthetic-stock difference (SSD), accurately estimates the part of stock's expected return arising from stock's transaction costs. We calculate SSD for U.S. optionable stocks. SSD can be more...

The detrended implied volatility of commodity options (VOL) forecasts the cross section of the commodity futures returns significantly. A zero-cost strategy that is long in low VOL and short in high VOL commodities yields an annualized return of 12.66% and a Sharpe ratio of 0.69. Notably, the...