Risk-neutral Modeling with Affine and Nonaffine Models

Garland B. Durham

Journal of Financial Econometrics, 2013, vol. 11, issue 4, 650-681

Abstract: Option prices provide a great deal of information regarding the market's expectations of future asset price dynamics. But, the implied dynamics are under the risk-neutral measure rather than the physical measure under which the price of the underlying asset itself evolves. This article demonstrates new techniques for joint analysis of the physical and risk-neutral models using data from both the underlying asset and options. While much of the prior work in this area has focused on affine and affine-jump models because of their analytical tractability, the techniques used in this article are straightforward to apply to a broad class of models of potential interest. The techniques are based on evaluating various integrals of interest using Monte Carlo sums over simulated volatility paths. In an application using S&P 500 index data, we find that log volatility models perform dramatically better than affine models, but that some evidence of misspecification remains. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbt009 (application/pdf)
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:oup:jfinec:v:11:y:2013:i:4:p:650-681

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().