A non-linear dynamic model of the variance risk premium

Hermite polynomial based expansion of European option prices

“…Such a model has been discussed in Aït-Sahalia (1999, and Gallant and Tauchen (1998) for modelling interest rates. Recently, Eraker and Wang (2012) have proposed a similar model for VIX options, which can also be nested within this framework.…”

A multifactor transformed diffusion model with applications to VIX and VIX futures

“…where Y (y; ) and 2 Y (y; ) are, respectively, the drift and di¤usion functions with parameter and fW t ; t 0g is a standard Brownian motion. Well known examples in …nance include Merton (1973), Vasicek (1977), Cox et al (1985), Du¢ e and Kan (1996), Aït-Sahalia (1996b), Conley et al (1997), Ahn and Gao (1999), Detemple and Osakwe (2000), and more recently Bu et al (2011), Eraker and Wang (2015), Bu, Jawadi and Li (2017), among others.…”

“…Nevertheless, nonlinearities beyond the assumptions of these models are often documented in the literature (c.f. Aït-Sahalia 1996b, Stanton 1997, Bu et al 2011, Eraker and Wang 2015, and Bu, Cheng and Hadri 2017) 1 . Hence, one strand of literature focuses on developing density approximation techniques for nonlinear di¤usions.…”

“…Hence, TDs are potentially ‡exible di¤usion models capable of capturing nonlinear features in the data while at the same time possess some desirable analytical and statistical tractability inherited from the more tractable UDs. Primary examples of TDs, among others, include Ahn and Gao (1999), Bu et al (2011), Goard and Mazur (2013), Forman and Sørensen (2014), Eraker and Wang (2015), and most recently Bu, Jawadi and Li (2017), Bu et al (2018).…”

Econometric analysis of financial derivatives: An overview

“…The purpose of the special issue is to highlight a number of areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the econometric analysis of financial derivatives, specifically market-based estimation of stochastic volatility models (Aït-Sahalia, Amengual and Manresa (2015)), the fine structure of equity-index option dynamics (Andersen, Bondarenko, Todorov and Tauchen (2015)), leverage and feedback effects in multifactor Wishart stochastic volatility for option pricing (Asai and McAleer (2015)), option pricing with non-Gaussian scaling and infinite-state switching volatility (Baldovin, Caporin, Caraglio, Stella and Zamparo (2015)), stock return and cash flow predictability: the role of volatility risk (Bollerslev, Xu and Zhou (2015)), the long and the short of the risk-return trade-off (Bonomo, Garcia, Meddahi and Tedongap (2015)), What's beneath the surface? option pricing with multifrequency latent states (Calvet, Fearnley, Fisher and Leippold (2015)), bootstrap score tests for fractional integration in heteroskedastic ARFIMA models, with an application to price dynamics in 4 commodity spot and futures markets (Cavaliere, Ørregaard Nielsen and Taylor (2015)), a stochastic dominance approach to financial risk management strategies (Chang, Jiménez-Martín, Maasoumi and Pérez-Amaral (2015)), empirical evidence on the importance of aggregation, asymmetry, and jumps for volatility prediction (Duong, and Swanson (2015)), non-linear dynamic model of the variance risk premium (Eraker and Wang (2015)), pricing with finite dimensional dependence (Gourieroux and Monfort (2015)), quanto option pricing in the presence of fat tails and asymmetric dependence (Kim, Lee, Mittnik and Park (2015)), smile from the past: a general option pricing framework with multiple volatility and leverage components (Majewski, Bormetti and Corsi (2015)), COMFORT: A common market factor non-Gaussian returns model (Paolella and Polak (2015)), divided governments and futures prices (Sojli and Tham (2015)), and model-based pricing for financial derivatives (Zhu and Ling (2015)). …”