Related papers: Option-based Equity Risk Premiums
We define a general method for finding a quasi-best approximant in sup-norm to a target density belonging to a given model, based on independent samples drawn from distributions which average to the target (which does not necessarily belong…
In this paper we take a look at a simple portfolio insurance strategy using a protective put and computationally derive the investor's governing utility structures underlying such a strategy under alternative market scenarios. Investor…
Existing approaches to asset-pricing under model-uncertainty adapt classical utility-maximization frameworks and seek theoretical comprehensiveness. We move toward practice by considering binary model-risks and by emphasizing 'constraints'…
A two-class mixture model, where the density of one of the components is known, is considered. We address the issue of the nonparametric adaptive estimation of the unknown probability density of the second component. We propose a randomly…
The paper has 2 main goals: 1. We propose a variant of the CAPM based on coherent risk. 2. In addition to the real-world measure and the risk-neutral measure, we propose the third one: the extreme measure. The introduction of this measure…
We construct a statistical indicator for the detection of short-term asset price bubbles based on the information content of bid and ask market quotes for plain vanilla put and call options. Our construction makes use of the martingale…
Model selection is often performed by empirical risk minimization. The quality of selection in a given situation can be assessed by risk bounds, which require assumptions both on the margin and the tails of the losses used. Starting with…
Volume weighted average price (VWAP) options are a popular security type in many countries, but despite their popularity very few pricing models have been developed so far for VWAP options. This can be explained by the fact that the VWAP…
We consider the problem of approximation of density functions which is important in the theory of pricing of basket options. Our method is well adopted to the multidimensional case. Observe that implementations of polynomial and spline…
Uncertainty requires suitable techniques for risk assessment. Combining stochastic approximation and stochastic average approximation, we propose an efficient algorithm to compute the worst case average value at risk in the face of tail…
We show that disentangling sentiment-induced biases from fundamental expectations significantly improves the accuracy and consistency of probabilistic forecasts. Using data from 1994 to 2017, we analyze 15 stochastic models and…
Generating realistic synthetic option prices requires implied volatility as an input, yet implied volatility is itself derived from observed option prices, creating a circular dependency that limits synthetic data for machine-learning and…
In this paper, we present a method for constructing a (static) portfolio of co-maturing European options whose price sign is determined by the skewness level of the associated implied volatility. This property holds regardless of the…
This paper gives yet another definition of game-theoretic probability in the context of continuous-time idealized financial markets. Without making any probabilistic assumptions (but assuming positive and continuous price paths), we obtain…
We consider a model selection estimator of the covariance of a random process. Using the Unbiased Risk Estimation (URE) method, we build an estimator of the risk which allows to select an estimator in a collection of model. Then, we present…
This paper examines the empirical failure of uncovered interest parity (UIP) and proposes a structural explanation based on a mean-reverting risk premium. We define a realized premium as the deviation between observed exchange rate returns…
This paper enhances the pricing of derivatives as well as optimal control problems to a level comprising risk. We employ nested risk measures to quantify risk, investigate the limiting behavior of nested risk measures within the classical…
We consider the problem of calculating risk-neutral implied volatilities of European options without relying on option mid prices but solely on bid and ask prices. We provide an approach, based on the conic finance paradigm, that allows to…
We present extensive evidence that ``risk premium'' is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the…
We consider the optimal investment and marginal utility pricing problem of a risk averse agent and quantify their exposure to a small amount of model uncertainty. Specifically, we compute explicitly the first-order sensitivity of their…