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Asymmetry in the jump-size distribution of the S&P 500: Evidence from equity and option markets

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  • Kaeck, Andreas

Abstract

This paper studies alternative distributions for the size of price jumps in the S&P 500 index. We introduce a range of new jump-diffusion models and extend popular double-jump specifications that have become ubiquitous in the finance literature. The dynamic properties of these models are tested on both a long time series of S&P 500 returns and a large sample of European vanilla option prices. We discuss the in- and out-of-sample option pricing performance and provide detailed evidence of jump risk premia. Models with double-gamma jump size distributions are found to outperform benchmark models with normally distributed jump sizes.

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  • Kaeck, Andreas, 2013. "Asymmetry in the jump-size distribution of the S&P 500: Evidence from equity and option markets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1872-1888.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:9:p:1872-1888
    DOI: 10.1016/j.jedc.2013.04.008
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    Cited by:

    1. Chevallier Julien & Goutte Stéphane, 2017. "On the estimation of regime-switching Lévy models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 3-29, February.
    2. Wanidwaranan, Phasin & Padungsaksawasdi, Chaiyuth, 2020. "The effect of return jumps on herd behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    3. Shaw, Charles, 2018. "Regime-Switching And Levy Jump Dynamics In Option-Adjusted Spreads," MPRA Paper 94154, University Library of Munich, Germany, revised 27 May 2019.
    4. Kaeck, Andreas & Rodrigues, Paulo & Seeger, Norman J., 2018. "Model Complexity and Out-of-Sample Performance: Evidence from S&P 500 Index Returns," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 1-29.
    5. Michael C. Fu & Bingqing Li & Guozhen Li & Rongwen Wu, 2017. "Option Pricing for a Jump-Diffusion Model with General Discrete Jump-Size Distributions," Management Science, INFORMS, vol. 63(11), pages 3961-3977, November.

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    More about this item

    Keywords

    Jump-size distribution; European options; S&P 500; Model calibration;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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