Option pricing should be based on a realistic process for the underlying and on the construction of a risk-neutral measure as induced by a no-arbitrage replication strategy. This paper presents a realistic and complete, "first principles,'' computation of option prices. The underlying is modeled...

A realistic ARCH process is set so as to duplicate for all practical purposes the properties of stock time series from 1 day to 1 year. The process includes heteroskedasticity with long memory, leverage, fat-tail innovations, relative return, price granularity, and holidays. Its adequacy to...

In a contestable market the possibility of "hit-and-run" entry prevents the price from rising above average cost. A contestable natural monopoly earns zero profits despite economies of scale. We show that informational imperfections can also result in a single firm serving the entire market with...