EconPapers    
Economics at your fingertips  
 

Option Valuation with Observable Volatility and Jump Dynamics

Peter Christoffersen, Bruno Feunou () and Yoontae Jeon

Staff Working Papers from Bank of Canada

Abstract: Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity dynamics. The volatility and jump intensity dynamics in the model are directly driven by model-free empirical measures of diffusive volatility and jump variation. Because the empirical measures are observed in discrete intervals, our option valuation model is cast in discrete time, allowing for straightforward filtering and estimation of the model. Our model belongs to the affine class, enabling us to derive the conditional characteristic function so that option values can be computed rapidly without simulation. When estimated on S&P500 index options and returns, the new model performs well compared with standard benchmarks.

Keywords: Asset; Pricing (search for similar items in EconPapers)
JEL-codes: G G1 G12 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2015
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16) Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2015/11/wp2015-39.pdf

Related works:
Journal Article: Option valuation with observable volatility and jump dynamics (2015) Downloads
Working Paper: Option Valuation with Observable Volatility and Jump Dynamics (2014) Downloads
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:bca:bocawp:15-39

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-02-02
Handle: RePEc:bca:bocawp:15-39