This chapter surveys the methods available for extracting information from option prices that
can be used in forecasting. We consider option-implied volatilities, skewness, kurtosis, and …

The classic Black-Scholes option pricing model assumes that returns follow Brownian
motion, but return processes differ from this benchmark in at least three important ways. First …

State-of-the-art stochastic volatility models generate a “volatility smirk” that explains why out-
of-the-money index puts have high prices relative to the Black-Scholes benchmark. These …

This paper examines model specification issues and estimates diffusive and jump risk
premia using S&P futures option prices from 1987 to 2003. We first develop a time series test …

We develop a GARCH option model with a new pricing kernel allowing for a variance
premium. While the pricing kernel is monotonic in the stock return and in variance, its …

We analyze the behavior of over-the-counter currency option prices across moneyness,
maturity, and calendar time on two of the most actively traded currency pairs over the past …

This paper presents a new model for the valuation of European options, in which the
volatility of returns consists of two components. One is a long-run component and can be …

Most recent empirical option valuation studies build on the affine square root (SQR)
stochastic volatility model. The SQR model is a convenient choice, because it yields closed …

We develop a simple robust method to distinguish the presence of continuous and
discontinuous components in the price of an asset underlying options. Our method …

This article develops a direct filtration-based maximum likelihood methodology for
estimating the parameters and realizations of latent affine processes. Filtration is conducted …