Assessing models of individual equity option prices

Gurdip Bakshi (), Charles Cao () and Zhaodong Zhong
Additional contact information
Gurdip Bakshi: Temple University
Charles Cao: Pennsylvania State University

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 1, No 1, 28 pages

Abstract: Abstract This article investigates option models in the encompassing class of stochastic volatility, return-jumps, and volatility-jumps. Relying on individual equity options on the 50 most active firms and maximum likelihood estimation method, we obtain several findings. First, while stochastic volatility is as important for individual equity options as it is for index options, return-jumps and volatility-jumps are also essential in pricing individual equity options. Second, the double-jump model improves pricing performance beyond return-jumps absent volatility-jumps, and beyond volatility-jumps absent return-jumps. Third, between return-jumps and volatility-jumps, the former is empirically more relevant than the latter for pricing options; and fourth, the inverse link between volatility-jumps and return-jumps is instrumental for explaining the valuation of deep out-of-money puts and the option dynamics of firms with high kurtosis.

Keywords: Individual equity option-models; Risk-neutral kurtosis; Return-jumps; Volatility-jumps; Stochastic volatility; Option-implied return distributions (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-020-00951-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:57:y:2021:i:1:d:10.1007_s11156-020-00951-4

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-020-00951-4

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().