What's Beneath the Surface? Option Pricing with Multifrequency Latent States

Laurent Calvet, Marcus Fearnley (marcusfearnley@gmail.com), Fisher Adlai J. (adlai.fisher@sauder.ubc.ca) and Markus Leippold (markus.leippold@bf.uzh.ch)

No 969, HEC Research Papers Series from HEC Paris

Abstract: We introduce a tractable class of non-affine price processes with multifrequency stochastic volatility and jumps. The specifi cations require few fixed parameters and deliver fast option pricing. One key ingredient is a tight link between jumps and volatility regimes, as asset pricing theory suggests. Empirically, the model matches implied volatility surfaces and their dynamics without requiring parameter recalibration. A variety of metrics show improvements over traditional benchmarks in- and out-of-sample.

Keywords: Markov-switching multifractal; particle filter; regime-switching; stochastic volatility; jump-risk premium; option pricing. (search for similar items in EconPapers)
JEL-codes: C51 G12 G13 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013-01-18
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: What is beneath the surface? Option pricing with multifrequency latent states (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0969

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