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The Impact of Overnight Periods on Option Pricing

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  • Boes, Mark-Jan
  • Drost, Feike C.
  • Werker, Bas J. M.

Abstract

This 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 Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 42 (2007)
Issue (Month): 02 (June)
Pages: 517-533

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Handle: RePEc:cup:jfinqa:v:42:y:2007:i:02:p:517-533_00

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References

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  1. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  2. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2001. "An Empirical Investigation of Continuous-Time Equity Return Models," NBER Working Papers 8510, National Bureau of Economic Research, Inc.
  3. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
  4. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
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Cited by:
  1. Tsiakas, Ilias, 2008. "Overnight information and stochastic volatility: A study of European and US stock exchanges," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 251-268, February.
  2. Entrop, Oliver & Scholz, Hendrik & Wilkens, Marco, 2009. "The price-setting behavior of banks: An analysis of open-end leverage certificates on the German market," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 874-882, May.
  3. Ahoniemi, Katja & Lanne, Markku, 2013. "Overnight stock returns and realized volatility," International Journal of Forecasting, Elsevier, vol. 29(4), pages 592-604.
  4. 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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