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Option prices with uncertain fundamentals theory and evidence on the dynamics of implied volatilities
In an incomplete information model, investors' uncertainty about the underlying drift rate of a firm's fundamentals affects option prices through (i) endogenous and belief-dependent stochastic volatility, (ii) stochastic covariance between returns and volatility, and (iii) a market price of "belief risk." For the special case where the drift takes only two values, we provide an option pricing formula using Fourier Transforms. The model calibrated to 1960-1998 S&P 500 real earnings growth shows that investors' uncertainty explains intertemporal variation in the slope and curvature of implied ...
Information acquisition in financial markets: a correction
This note provides a proper example for the mechanism of strategic complementarities proposed in our paper. ; Original paper in Review of Economic Studies, January 2000, v. 67, no.1, p. 79?90.