The role of time-varying jump risk premia in pricing stock index options

Jaeho Yun

Journal of Empirical Finance, 2011, vol. 18, issue 5, 833-846

Abstract: This paper examines out-of-sample option pricing performances for the affine jump diffusion (AJD) models by using the S&P 500 stock index and its associated option contracts. In particular, we investigate the role of time-varying jump risk premia in the AJD specifications. Our empirical analysis shows strong evidence in favor of time-varying jump risk premia in pricing cross-sectional options. We also find that, during a period of low volatility, the role of jump risk premia becomes less pronounced, making the differences across pricing performances of the AJD models not as substantial as during a period of high volatility. This finding can possibly explain poor pricing perfomances of the sophisticated AJD models in some previous studies whose sample periods can be characterized by low volatility.

Keywords: Option pricing; Affine jump diffusion; Time-varying jump risk premia (search for similar items in EconPapers)
JEL-codes: C1 C5 G1 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:18:y:2011:i:5:p:833-846

DOI: 10.1016/j.jempfin.2011.07.003

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