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...

In Andersen and Bondarenko (2014), using tick data for S&P 500 futures, we establish that the VPIN metric of Easley, Lopez de Prado, and O'Hara (ELO), by construction, will be correlated with trading volume and return volatility (innovations). Whether VPIN is more strongly correlated with volume...

We propose a novel model-free approach to obtain the joint risk-neutral distribution among several assets that is consistent with market prices of options on these assets and their weighted index. In an empirical application, we use options on the S&P 500 index and its nine industry sectors. The...