EconPapers    
Economics at your fingertips  
 

Good Volatility, Bad Volatility and Option Pricing

Bruno Feunou () and Cédric Okou

Staff Working Papers from Bank of Canada

Keywords: Asset Pricing; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 48 pages Advances in variance analysis permit the splitting of the total quadratic variation of a jump diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of the asymmetry in stock price distributions. To appraise the economic gain of this decomposition, we design a new and flexible option pricing model in which the underlying asset price exhibits distinct upside and downside semi-variance dynamics driven by their model-free proxies. The new model outperforms common benchmarks, especially the alternative that splits the quadratic variation into diffusive and jump components.
Date: 2017
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2017/12/swp2017-52.pdf

Related works:
Journal Article: Good Volatility, Bad Volatility, and Option Pricing (2019) 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:17-52

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:17-52