Publications and Working papers

Early Exercise Decision in American options with dividends, stochastic volatility and jumps  (A. Cosma, S. Galluccio, P. Pederzoli, O. Scaillet)

Forthcoming in the Journal of Financial and Quantitative Analysis

   Supplemental file   DLL and Matlab code

Using a fast numerical technique, we investigate a large database of investor suboptimal non-exercise of short maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modelling of the discrete dividend is essential for a correct calculation of the early exercise boundary as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black-Scholes-Merton benchmark cuts by a quarter the amount lost by investors through suboptimal exercise. The remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.

Crash Risk in Individual Stocks


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In this paper I study and implement skewness swaps in individual stocks, which are trading strategies closely related to the more familiar variance swaps. Just as variance swap returns measure the variance risk premium, skewness swap returns measure the skewness risk premium. I document that (i) the returns of the skewness swaps in individual stocks are positive and significant (ii) after the 2008/2009 financial crisis the returns of the skewness swaps on individual stocks increase substantially while the return of the skewness swap on the market index does not change. The result is robust for different measures of skewness and it is not driven by the difference in option data availability and liquidity between the index and individual stocks. This result provides evidence of a new idiosyncratic skewness risk priced in individual stock. I finally discuss different possible explanations for this pattern.