The Impact of Overnight Periods on Option Pricing
AbstractThis paper investigates the effect of closed overnight exchanges on option prices.During the trading day asset prices follow the literature s standard affine model which allows asset prices to exhibit stochastic volatility and random jumps.Independently, the overnight asset price process is modelled by a single jump.We find that the overnight component reduces the variation in the random jump process significantly.However, neither the random jumps nor the overnight jumps alone are able to empirically describe all features of asset prices.We conclude that both random jumps during the day and overnight jumps are important in explaining option prices, where the latter account for about one quarter of total jump risk.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.
Volume (Year): 42 (2007)
Issue (Month): 02 (June)
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Other versions of this item:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Ito, Ryoko, 2013. "Modeling dynamic diurnal patterns in high frequency financial data," Cambridge Working Papers in Economics 1315, Faculty of Economics, University of Cambridge.
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