Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. We fill this gap by first deriving an option model that allows volatility, interest rates and jumps to be stochastic. Using S&P 500 options, we examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant timeseries data, (2) out-of-sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance. IN THE LAST TWO DECADES

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TAK-242 failed to suppress cytokine levels in patients with sepsis and shock or respiratory failure. Treatment with TAK-242 resulted in mild increases in serum methemoglobin levels but was otherwise well tolerated. Although observed mortality rates in patients with both shock and respiratory failure were lower with the 2.4 mg/kg/day dose, differences were not significant.

This paper examines informed trading in the options versus the stock market prior to takeover announcements. Prior to an announcement, the percentage increase in call volume for target firms is roughly four times as large as the increase in stock volume. Moreover, preannouncement option volume is the heaviest in those takeover targets that experience the highest announcement-day returns. Short-term out-of-the-money calls experience the largest increase in buy-side trading, suggesting that the activity is dominated by those who are relatively certain an announcement will occur soon. We also use volume-triggered trading rules to further assess the relationship between call volume and future returns as well as the profitability of option trading prior to takeovers. Trading profits are increasing in the amount of call volume required to trigger a buy signal. However, similar trading rules using stock volume reveal no such patterns. When these trading rules are applied to all firms with options listed on the CBOE, large increases in call-option trading are again followed by higher subsequent returns. Our results indicate that between the options and the stock markets, informed investors prefer to trade on the former market. Thus, the options market is more conducive to information and price discovery. 1 known that when the underlying stock price follows a one-dimensional diffusion process, an option in a perfect-market environment can always be replicated by combining the underlying with a riskfree asset. In real life, however, information is often asymmetric (especially before major corporate announcements) and trading frictions (e.g. transaction costs, short sale and capital constraints) are abundant, making options non-redundant. For instance, Back (1993) shows that with asymmetric information option and stock volumes convey different information and thus it is not possible to replicate an option with the underlying stock. However, options are also generally associated with higher proportional transaction costs, less liquidity, and trading in options may be more transparent due to lower volume levels. Thus, it is an empirical question as to whether informed traders indeed prefer to trade in options. In the existing literature, several studies have examined the general question of whether options trading changes the informational efficiency of equity-related markets. For example, Klemkosky and

While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretical link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm-specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations. Campbell, Lettau, Malkiel, and Xu (2001) document increasing firm-level return volatility but stable market and industry return volatilities over the last four decades. Subsequently, there has been a flurry of work attempting to characterize the upward trend in idiosyncratic volatility. 1 We now know that increasing idiosyncratic volatility is: (1) related to the level and variance of profitability (Pastor and Veronesi 2003 and Wei and Zhang 2006); (2) positively related to institutional ownership and expected earnings growth (Malkiel and Xu 2003); (3) negatively related to firm age We are grateful to Choong