@techreport{5a5ccddd27f44078b92fcd6c97c40359,
title = "Option Valuation with Volatility Components, Fat Tails, and Non-Monotonic 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 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.",
keywords = "Volatility components, Fat tails, Jumps, Pricing kernel, Volatility components, Fat tails, Jumps, Pricing kernel",
author = "Kadir Babaoglu and Peter Christoffersen and Heston, {Steven L.} and Kris Jacobs",
year = "2016",
month = nov,
doi = "10.2139/ssrn.2690888",
language = "English",
series = "Rotman School of Management Working Paper",
publisher = "Rotman School of Management, University of Toronto",
number = "2690888",
address = "Canada",
type = "WorkingPaper",
institution = "Rotman School of Management, University of Toronto",
}