Time-varying jump tails

Tim Bollerslev and Viktor Todorov

Journal of Econometrics, 2014, vol. 183, issue 2, 168-180

Abstract: We develop new methods for the estimation of time-varying risk-neutral jump tails in asset returns. In contrast to existing procedures based on tightly parameterized models, our approach imposes much fewer structural assumptions, relying on extreme-value theory approximations together with short-maturity options. The new estimation approach explicitly allows the parameters characterizing the shape of the right and the left tails to differ, and importantly for the tail shape parameters to change over time. On implementing the procedures with a panel of S&P 500 options, our estimates clearly suggest the existence of highly statistically significant temporal variation in both of the tails. We further relate this temporal variation in the shape and the magnitude of the jump tails to the underlying return variation through the formulation of simple time series models for the tail parameters.

Keywords: Market risk; Options; Risk-neutral distributions; Jumps; Time-varying jump tails; Extreme value theory (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:183:y:2014:i:2:p:168-180

DOI: 10.1016/j.jeconom.2014.05.007

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