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Information about price and volatility jumps inferred from options prices

Stephen J. Taylor, Chi‐Feng Tzeng and Martin Widdicks

Journal of Futures Markets, 2018, vol. 38, issue 10, 1206-1226

Abstract: High‐frequency jump tests are applied to the prices of both futures contracts and their options, to infer the properties of jumps in the price and volatility of the underlying asset. Empirical results for FTSE 100 contracts detect frequent jumps in futures, call, and put prices. Jumps in futures prices are more important than any jumps in volatility when the market determines option prices. The empirical evidence is consistent with futures prices following affine jump‐diffusion processes, containing either futures price jumps or contemporaneous futures price, and volatility jumps, providing jump risk premia are included in the price dynamics.

Date: 2018
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Handle: RePEc:wly:jfutmk:v:38:y:2018:i:10:p:1206-1226