Option Valuation with Observable Volatility and Jump Dynamics

Peter Christoffersen, Bruno Feunoua, Yoontae Jeon

Publikation: Working paperForskning

Abstrakt

Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity dynamics. The volatility and jump intensity dynamics in the model are directly driven by model-free empirical measures of diffusive volatility and jump variation. Because the empirical measures are observed in discrete intervals, our option valuation model is cast in discrete time, allowing for straightforward filtering and estimation of the model. Our model belongs to the affine class enabling us to derive the conditional characteristic function so that option values can be computed rapidly without simulation. When estimated on S&P500 index options and returns the new model performs well compared with standard benchmarks.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverAarhus Universitetsforlag
Antal sider47
DOI
StatusUdgivet - 2015
NavnCreates Research Paper
Nummer2015-7
NavnRotman School of Management Working Paper
Nummer2494379
NavnStaff Working Paper / Bank of Canada
Nummer2015-39
ISSN1701-9397

Emneord

  • Dynamic volatility
  • Dynamic jumps
  • Realized volatility
  • Realized jumps

Citationsformater