This paper investigates the pricing of differentiated products in a vertical sector, with a focus on the role of industry concentration. We propose concentration indices that extend the classical Hirschman-Herfindahl Index (HHI) to include vertical structures that manage differentiated products. We also identify how substitution/complementarity among products affects pricing. We compare our pro...

We investigate “jump memory” using an extensive data base of short-term S&P 500 Index options. Jump memory refers to the attenuation of the implied jump intensity and magnitude parameters following a jump event. Behavioral and rational explanations for parameter attenuation are posited. A genetic algorithm is used to obtain implied parameter estimates. The pricing accuracy of the jump-diffusion...

In parametric models a su cient condition for local identi cation is that the vector of moment conditions is di erentiable at the true parameter with full rank derivative matrix. We show that there are corresponding su cient conditions for nonparametric models. A nonparametric rank condition and di erentiability of the moment conditions with respect to a certain norm imply local identi cation. ...

This paper compares the performance of Black-Scholes with an artificial neural network (ANN) in pricing European style call options on the FTSE 100 index. It is the first extensive study of the performance of ANNs in pricing UK options, and the first to allow for dividends in the closed-form model. For out-of themoney options, the ANN is clearly superior to Black-Scholes. For in-the-money optio...

Inception of Markowitz’s modern portfolio theory has also fuelled the development of asset pricing models for empirical finance, ranging from linear single-factor models like the capital asset pricing model to fairly complex multi-factor models such as the arbitrage pricing theory (APT). It is well-known in the literature of finance that APT could be used for modelling the underlying security r...

This paper uses an HJM model to price TIPS and related derivative securities. First, using the market prices of TIPS and ordinary U.S. Treasury securities, both the real and nominal zero-coupon bond price curves are obtained using standard coupon-bond price stripping procedures. Next, a three-factor arbitragefree term structure model is fit to the time series evolutions of the CPI-U and the rea...

By extending the GARCH option pricing model of Duan (1995) to more exible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage eeect, simulated...

This paper questions one of the fundamental assumptions made in options pricing: that the daily returns of a stock are independent and identically distributed (IID). We apply an estimation procedure to years of daily return data for all stocks in the French CAC-40 index. We find six stocks whose log returns are best modeled by a first-orderMarkov chain, not an IID sequence. We further propose t...