We investigate the information content of the call (put) Early Exercise Premium, or EEP , defined as the normalized difference in prices between otherwise comparable American and European call (put) options. The call EEP specifically captures investors’ expectations about future lump sum dividend payments as well as other state variables such as conditional volatility and interest rates. From t...

This paper describes a Bayesian nonparametric approach to volatility estimation. Volatility is assumed to follow a superposition of an infinite number of Ornstein–Uhlenbeck processes driven by a compound Poisson process with a parametric or nonparametric jump size distribution. This model allows a wide range of possible dependencies and marginal distributions for volatility. The properties of t...

We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and remarkably consistent across specifications of the pricing kernel, and across the two markets. The resul...

Index option pricing on world market indices are investigated using Lévy processes with no positive jumps. Economically this is motivated by the possible absence of longer horizon short positions while mathematically we are able to evaluate for such processes the probability of a Rally Before a Crash (RBC). Three models are used to e¤ectively calibrate index options at an annual maturity and it...

Extreme value theory is used to derive asymptotically motivated models for unusual or rare events, e.g. the upper or lower tails of a distribution. A new, flexible extreme value mixture model is proposed combining a nonparametric kernel density estimator with an appropriate tail model, which overcomes the key issue of determining the threshold which defines the distribution tail and accounts fo...

This article investigates the association between stock market activity and mental well-being, exploiting the availability of interview dates in the British Household Panel Survey to match changes in the FTSE 100 stock price index to respondents over the period 1991–2008. We present evidence that annual changes in the price index are associated with better mental well-being whilst greater uncer...

We study how stock return’s predictability and model uncertainty affect a rational buy-and-hold investor’s decision to allocate her wealth for different lengths of investment horizons in the UK market. We consider the FTSE All-Share Index as the risky asset, and the UK Treasury bill as the risk free asset in forming the investor’s portfolio. We identify the most powerful predictors of the stock...

This paper describes a generally applicable robust method for determining prediction intervals for models derived by non-linear regression. Hypothesis tests for bias are applied. The concept is demonstrated by application to a standard synthetic example, and is then applied to prediction intervals for a financial engineering example viz. option pricing using data from LIFFE for 'ESX' European s...