Estimating expectations of shocks using option prices

Antonio Di Cesare ()

No 506, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The jump-diffusion model introduced by Merton is used to price a cross- section of options at different dates. At any point in time, the parameters of the model are estimated by minimizing the sum of squared implied volatility errors, and their informational content is compared with the widely used Black and Scholes implied volatility, calculated on at-the-money options. While in normal conditions the parameters of Merton's model do not seem to provide any additional information, in periods of high variability of asset prices the jump-diffusion approach may help to disentangle the cases in which volatility reflects only uncertainty on economic fundamentals from those in which it is fuelled by fears of �nancial crisis.

Keywords: jump-diffusion stochastic processes; option pricing; volatility (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_506_04

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