Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

Kadir Gokhan Babaoglu; Peter  Christoffersen; Steven Heston; Kris Jacobs

Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

Kadir Gokhan Babaoglu, Peter Christoffersen, Steven Heston, Kris Jacobs

Institut for Finansiering

Publikation: Konferencebidrag › Paper › Forskning › peer review

Abstrakt

We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option …fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option …fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.

Originalsprog	Engelsk
Publikationsdato	18 feb. 2014
Antal sider	44
Status	Udgivet - 18 feb. 2014
Begivenhed	The 41th European Finance Association Annual Meeting (EFA 2014) - Palazzo dei Congressi, Lugano, Schweiz Varighed: 27 aug. 2014 → 30 aug. 2014 Konferencens nummer: 41 http://www.efa2014.org/

Konference

Konference	The 41th European Finance Association Annual Meeting (EFA 2014)
Nummer	41
Lokation	Palazzo dei Congressi
Land/Område	Schweiz
By	Lugano
Periode	27/08/2014 → 30/08/2014
Internetadresse	http://www.efa2014.org/

Emneord

Volatility components
Fat tails
Jumps
Pricing kernel

Adgang til dokumentet

https://www.conftool.com/efa2014/index.php/EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf?page=downloadPaper&filename=EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf&form_id=336

Handle.net

Persistent link

Citationsformater

Babaoglu, K. G., Christoffersen, P., Heston, S., & Jacobs, K. (2014). Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Paper præsenteret på The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Schweiz. https://www.conftool.com/efa2014/index.php/EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf?page=downloadPaper&filename=EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf&form_id=336

@conference{a9ac6686acb547bbb5ca9cb028b2aeea,

title = "Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels",

abstract = "We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option …fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option …fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.",

keywords = "Volatility components, Fat tails, Jumps, Pricing kernel",

author = "Babaoglu, {Kadir Gokhan} and Peter Christoffersen and Steven Heston and Kris Jacobs",

year = "2014",

month = feb,

day = "18",

language = "English",

note = "null ; Conference date: 27-08-2014 Through 30-08-2014",

url = "http://www.efa2014.org/",

}

Babaoglu, KG, Christoffersen, P, Heston, S & Jacobs, K 2014, 'Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels', Paper fremlagt ved The 41th European Finance Association Annual Meeting (EFA 2014), Lugano, Schweiz, 27/08/2014 - 30/08/2014. <https://www.conftool.com/efa2014/index.php/EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf?page=downloadPaper&filename=EFA_2014-336-Babaoglu-Option_Valuation_with_Volatility_Components%2C_Fat_Tails%2C_and_Nonlinear_Pricing_Kernels_a.pdf&form_id=336>

TY - CONF

T1 - Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

AU - Babaoglu, Kadir Gokhan

AU - Christoffersen, Peter

AU - Heston, Steven

AU - Jacobs, Kris

N1 - Conference code: 41

PY - 2014/2/18

Y1 - 2014/2/18

N2 - We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option …fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option …fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.

AB - We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option …fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option …fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.

KW - Volatility components

KW - Fat tails

KW - Jumps

KW - Pricing kernel

M3 - Paper

Y2 - 27 August 2014 through 30 August 2014

ER -