What's Beneath the Surface? Option Pricing with Multifrequency Latent States

Laurent Calvet, Marcus Fearnley (), Fisher Adlai J. () and Markus Leippold ()

No 969, HEC Research Papers Series from HEC Paris

Abstract: We introduce a tractable class of non-affine price processes with multifrequency stochastic volatility and jumps. The specifi cations require few fixed parameters and deliver fast option pricing. One key ingredient is a tight link between jumps and volatility regimes, as asset pricing theory suggests. Empirically, the model matches implied volatility surfaces and their dynamics without requiring parameter recalibration. A variety of metrics show improvements over traditional benchmarks in- and out-of-sample.

Keywords: Markov-switching multifractal; particle filter; regime-switching; stochastic volatility; jump-risk premium; option pricing. (search for similar items in EconPapers)
JEL-codes: C51 G12 G13 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013-01-18
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: What is beneath the surface? Option pricing with multifrequency latent states (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0969

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