Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity...

We propose a new decomposition of the variance risk premium in terms of upside and downside variance risk premia. The difference between upside and downside variance risk premia is a measure of skewness risk premium. We establish that the downside variance risk premium is the main component of...

Plain vanilla options have a single underlying asset and a single condition on the payoff at the expiration date. For this class of options, a well-known result of Duffie, Pan and Singleton (2000) shows how to invert the characteristic function to obtain a closed-form formula for their prices....

This paper addresses an existing gap in the developing literature on conditional skewness. We develop a simple procedure to evaluate parametric conditional skewness models. This procedure is based on regressing the realized skewness measures on model-implied conditional skewness values. We find...

Cochrane and Piazzesi (2005) show that (i) lagged forward rates improve the predictability of annual bond returns, adding to current forward rates, and that (ii) a Markovian model for monthly forward rates cannot generate the pattern of predictability in annual returns. These results stand as a...

We provide a decomposition of nominal yields into real yields, expectations of future inflation and inflation risk premiums when real bonds or inflation swaps are unavailable or unreliable due to their relative illiquidity. We combine nominal yields with surveys of inflation forecasts within a...

Theoretical risk factors underlying time-variations of risk premium across asset classes are typically unobservable or hard to measure by construction. Important examples include risk factors in Long Run Risk [LRR] structural models (Bansal and Yaron 2004) as well as stochastic volatility or...

Expected returns vary when investors face time-varying investment opportunities. Longrun risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician. We show that, for both classes of...

We provide results for the valuation of European style contingent claims for a large class of specifications of the underlying asset returns. Our valuation results obtain in a discrete time, infinite state-space setup using the no-arbitrage principle and an equivalent martingale measure. Our...

We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk...