Realized bipower variation, jump components, and option valuation

Zhiyuan Pan, Yudong Wang and Li Liu

Journal of Futures Markets, 2021, vol. 41, issue 12, 1933-1958

Abstract: We develop a new option pricing model that captures the jump dynamics and allows for the different roles of positive and negative return variances. Based on the proposed model, we derive a closed‐form solution for option pricing under the condition of a nonmonotonic pricing kernel. Our results indicate that the new model has superior option pricing performance to its nested models, including the jump model of Christoffersen et al. (2015) and affine realized semivariance model of Feunou and Okou (2019). The models accommodating jumps, high‐frequency information, and accounting for variance risk premium perform well compared with traditional benchmark models.

Date: 2021
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