A locally-built, LLM-digested index of recent arXiv papers in quant finance, geometry/topology, and statistical ML — keyword search served straight from SQLite on this machine.
The study reveals unspanned risks in equity option risk premiums, explaining negative premiums for certain options.
Realized GARCH model explains VIX and VRP dynamics.
Analyzes how rough volatility affects stock pricing and risk premium.
We revisit the problem of pricing options with historical volatility estimators. We do this in the context of a generalized GARCH model with multiple time scales and asymmetry. It is argued that the reason for the observed volatility risk premium is tail risk aversion. We parametrize such risk aversion in terms of thre…
New volatility model for option pricing with time-varying risk premium.
We study the risk premium impact in the Perturbative Black Scholes model. The Perturbative Black Scholes model, developed by Scotti, is a subjective volatility model based on the classical Black Scholes one, where the volatility used by the trader is an estimation of the market one and contains measurement errors. In t…
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 Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry,…
We derive representations of local risk-minimization of call and put options for Barndorff-Nielsen and Shephard models: jump type stochastic volatility models whose squared volatility process is given by a non-Gaussian rnstein-Uhlenbeck process. The general form of Barndorff-Nielsen and Shephard models includes two par…
For a commodity spot price dynamics given by an Ornstein-Uhlenbeck process with Barndorff-Nielsen and Shephard stochastic volatility, we price forwards using a class of pricing measures that simultaneously allow for change of level and speed in the mean reversion of both the price and the volatility. The risk premium i…
Proposes deep hedging for index options using implied volatility surface.
Proposes a new portfolio theory that optimizes returns and risk.
New model for options pricing accounting for time-varying interest rates, volatility, and equity premium.
The paper models exchange rate risk premium using mean-reverting dynamics.
The paper proposes a new SDF scaled by time-varying volatility from S&P 500 options.
This study develops a multi-factor framework where not only market risk is considered but also potential changes in the investment opportunity set. Although previous studies find no clear evidence about a positive and significant relation between return and risk, favourable evidence can be obtained if a non-linear rela…
This paper analyzes a game between insurer and reinsurer under ambiguity and risk aversion, optimizing reinsurance and investment strategies.
The study finds a liquidity premium in stock returns, but only after correcting for microstructure noise.
In the presence of ambiguity on the driving force of market randomness, we consider the dynamic portfolio choice without any predetermined investment horizon. The investment criteria is formulated as a robust forward performance process, reflecting an investor's dynamic preference. We show that the market risk premium …
Study finds significant premium for low-beta stocks in firm-level idiosyncratic return distributions.
We formulate and analyze an inverse problem using derivatives prices to obtain an implied filtering density on volatility's hidden state. Stochastic volatility is the unobserved state in a hidden Markov model (HMM) and can be tracked using Bayesian filtering. However, derivative data can be considered as conditional ex…
This work presents an asset pricing model that under rational expectation equilibrium perspective shows how, depending on risk aversion and noise volatility, a risky-asset has one equilibrium price that differs in term of efficiency: an informational efficient one (similar to Campbell and Kyle (1993)), and another one …
Examines US equity risk premiums amid COVID-19.
The risk premium of a policy is the sum of the pure premium and the risk loading. In the classification ratemaking process, generalized linear models are usually used to calculate pure premiums, and various premium principles are applied to derive the risk loadings. No matter which premium principle is used, some risk …
We find that when measured in terms of dollar-turnover, and once -neutralised and Low-Vol neutralised, the Size Effect is alive and well. With a long term t-stat of , the "Cold-Minus-Hot" (CMH) anomaly is certainly not less significant than other well-known factors such as Value or Quality. As compared to marke…
The study uses equity order flow to forecast stock returns and resolves the liquidity premium puzzle.
This study examines how earnings announcements affect option volatility and pricing.
According to the volatility feedback effect, an unexpected increase in squared volatility leads to an immediate decline in the price-dividend ratio. In this paper, we consider the properties of stock price dynamics and option valuations under the volatility feedback effect by modeling the joint dynamics of stock price,…
A new method to break down insurance costs into risk and uncertainty.
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification effect on risk-sharing distortions that helps resolve the interest rate puzzle …
This paper examines foreign exchange risk premia from simple univariate regressions to the state-space method. The adjusted traditional regressions properly figure out the existence and time-evolving property of the risk premia. Successively, the state-space estimations overall are quite rationally competent in examini…
A new insurance and reinsurance pricing scheme based on realized loss.
Introduces an unobservable intrinsic electricity price to link storage theory with risk premium.
New model solves equity premium puzzle.
Equity risk premium is a central component of every risk and return model in finance and a key input to estimate costs of equity and capital in both corporate finance and valuation. An article by Damodaran examines three broad approaches for estimating the equity risk premium. The first is survey based, it consists in …
A new model for heterogeneous populations optimizes consumption and investment over short horizons.
Study evaluates three position sizing methods for put-writing on S&P 500 Index options.
The study introduces new liquidity measures and models for assets with extreme liquidity.
New model solves equity premium puzzle with risk aversion coefficient.
Study examines risk premium convergence rates in risk sharing contracts.
We propose a probabilistic framework for pricing derivatives, which acknowledges that information and beliefs are subjective. Market prices can be translated into implied probabilities. In particular, futures imply returns for these implied probability distributions. We argue that volatility is not risk, but uncertaint…
Cryptocurrency markets show higher spreads during extreme fear and greed phases.
Paper finds significant impact of stock market swings on equity risk premium predictability.
In this paper, we consider the problem of optimal reinsurance design, when the risk is measured by a distortion risk measure and the premium is given by a distortion risk premium. First, we show how the optimal reinsurance design for the ceding company, the reinsurance company and the social planner can be formulated i…
The risk premium is one of main concepts in mathematical finance. It is a measure of the trade-offs investors make between return and risk and is defined by the excess return relative to the risk-free interest rate that is earned from an asset per one unit of risk. The purpose of this article is to determine upper and …
Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might reduce the value policyholders attach to and premiums they are willing to pay for i…
This paper investigates the time-varying risk-premium relation of the Chinese stock markets within the framework of cross-sectional momentum and contrarian effects by adopting the Capital Asset Pricing Model and the French-Fama three factor model. The evolving arbitrage opportunities are also studied by quantifying the…
We construct the term structure of the (forward-looking, US market) equity risk premium from SPX option chains. The method is "model-light". Risk-neutral probability densities are estimated by fitting -component Gaussian mixture models to option quotes, where is a small integer (here 4 or 5). These densities are…
The paper examines how risk reduction and insurance choices interact under convex premium principles.