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

Kadir Babaoğlu, Peter Christoffersen, Steven Heston, Kris Jacobs

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Resumé

We nest multiple volatility components, fat tails, and a U-shaped pricing kernel in a single option model and compare their contribution in describing returns and option data. All three features lead to statistically significant model improvements. A U-shaped pricing kernel is economically most important and improves option fit by 17%, on average, and more so for two-factor models. A second volatility component improves the option fit by 9%, on average. Fat tails improve option fit by just over 4%, on average, but more so when a U-shaped pricing kernel is applied. Overall, these three model features are complements rather than substitutes: the importance of one feature increases in conjunction with the others.
OriginalsprogEngelsk
TidsskriftThe Review of Asset Pricing Studies
Vol/bind8
Udgave nummer2
Sider (fra-til)183–231
Antal sider49
ISSN2045-9920
DOI
StatusUdgivet - dec. 2018

Emneord

  • Asset pricing
  • Trading volume
  • Bond interest rates

Citer dette

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Option Valuation with Volatility Components, Fat Tails, and Nonmonotonic Pricing Kernels. / Babaoğlu, Kadir; Christoffersen, Peter; Heston, Steven; Jacobs, Kris.

I: The Review of Asset Pricing Studies, Bind 8, Nr. 2, 12.2018, s. 183–231.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

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