Good Volatility, Bad Volatility and Option Pricing

Bruno Feunou and Cédric Okou

Staff Working Papers from Bank of Canada

Keywords: Asset Pricing; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 48 pages Advances in variance analysis permit the splitting of the total quadratic variation of a jump diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of the asymmetry in stock price distributions. To appraise the economic gain of this decomposition, we design a new and flexible option pricing model in which the underlying asset price exhibits distinct upside and downside semi-variance dynamics driven by their model-free proxies. The new model outperforms common benchmarks, especially the alternative that splits the quadratic variation into diffusive and jump components.
Date: 2017
New Economics Papers: this item is included in nep-cfn
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Journal Article: Good Volatility, Bad Volatility, and Option Pricing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-52

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