The objective of this course is to cover the recent advances in models capturing joint dynamics of
assets and the associated derivatives. These models allow a researcher to quantify sources of risk
affecting an asset and how each of these risks is priced. This information is useful for practical use of
derivatives (how much do you earn when you sell out-of-the-money puts and why?) and for
development of realistic general equilibrium models. We will cover both empirical methods and
findings in this area.
READINGS
Andersen, Torben G., Luca Benzoni, and Jesper Lund, 2002, An empirical investigation of
continuous-time equity return models, Journal of Finance 57, 1239–1284.
Backus, David, Mikhail Chernov, and Ian Martin, 2011, Disasters implied by equity index options,
Journal of Finance 66, 1967–2010.
Bates, David S., 1996, Jumps and stochastic volatility: Exchange rate processes implicit in
deutsche mark options, Review of Financial Studies 9, 69–107.
Benzoni, Luca, Pierre Collin-Dufresne, and Robert S. Goldstein, 2011, “Can standard pref-
erences explain the prices of out-of-the-money S&P 500 put options?,” Journal of Financial
Economics, forthcoming.
Bollerslev, Tim, George Tauchen and Hao. Zhou, 2009, Expected Stock Returns and
Variance Risk Premia, Review of Finanial Studies.
Bollerselv, Tim and Viktor Todorov, 2011, Tails, fears, and risk premia, Journal of Finance
Broadie, Mark, Mikhail Chernov, and Michael Johannes, 2007, Model specification and risk
premia: Evidence from futures options, Journal of Finance 62, 1453–1490.
Broadie, Mark, Mikhail Chernov, and Michael Johannes, 2009, “Understanding index option
returns,” Review of Financial Studies
Carr, Peter, and Liuren Wu, 2007, Stochastic skew in currency options, Journal of Financial
Economics 86, 213–247.
Chabi-Yo, Fousseni, Rene Garcia, and Eric Renault, 2008, “State-dependence can explain the
risk aversion puzzle,” Review of Financial Studies 21, 973-1011.
Empirical Option Pricing, M. Chernov, January 2012
Chernov, Mikhail, 2007, On the role of risk premia in volatility forecasting, Journal of Business
and Economic Statistics 25, 411–426.
Chernov, Mikhail, A. Ronald Gallant, Eric Ghysels, and George Tauchen, 2003, Alternative
models for stock price dynamics, Journal of Econometrics 116, 225–257.
Chernov, Mikhail, and Eric Ghysels, 2000, A study towards a unified approach to the joint
estimation of objective and risk neutral measures for the purposes of options valuation, Journal of
Financial Economics 56, 407–458.
Cheung, Sam, 2008, An empirical analysis of joint time-series of returns and the term- structure
of option prices, Working paper, Columbia University.
Drechsler, Itamar, and Amir Yaron, 2009, “What’s vol got to do with it?” Review of Financial
Studies
Dubinsky, Andrew and Michael Johannes, 2006, Earnings Announcements and Equity Options,
with Andrew Dubinsky, working paper
Duffie, Darrell, Jun Pan, and Kenneth Singleton, 2000, Transform analysis and asset pricing for
affine jump-diffusions, Econometrica 68, 1343–1376.
Eraker, Bjorn, 2004, Do stock prices and volatility jump? Reconciling evidence from spot and
option prices, Journal of Finance 59, 1367–1404.
Eraker, Bjorn, Michael Johannes, and Nicholas Polson, 2003, The impact of jumps in volatility
and returns, Journal of Finance 58, 1269–1300.
Garcia, Rene, Richard Luger, and Eric Renault, 2003, “Empirical assessment of an in-
tertemporal option pricing model with latent variables,” Journal of Econometrics 116, 49-83.
Johannes, Michael and Nicholas G. Polson, 2009, MCMC methods in financial econometrics, in
Yacine Aït-Sahalia, and Lars Hansen, ed.: Handbook of Financial Econometrics, 1-72 (Elsevier:
Oxford).
Jones, Christopher S., 2003, The dynamics of stochastic volatility: Evidence from underlying and
options markets, Journal of Econometrics 116, 181–224.
Martin, Ian, 2011, Simple variance swaps, Working paper.
Pan, Jun, 2002, The jump-risk premia implicit in options: Evidence from an integrated time-series
study, Journal of Financial Economics 63, 3–50.
Pastorello, Sergio, Eric Renault, and Nizar Touzi, 2000, Statistical inference for random- variance
option pricing, Journal of Business and Economic Statistics 18, 358–367.
Shaliastovich, Ivan, 2008, “Learning, confidence and option prices,” manuscript.
Finance professors rarely write what you are asking. So just follow the ppt notes and read papers suggested and understand them, then replicate the results, you will be great.
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