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Jump dynamics, spillover effect and option valuation

Author

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  • Pan, Zhiyuan
  • Shuai, Jiangyu
  • Liang, Zhilei
  • Sun, Xianchao

Abstract

In this paper, we propose an affine discrete-time model that incorporates the jump process and spillover effect for valuing the 50 ETF options in China. Based on the proposed model, a closed-form solution is also derived for the new dynamics of underlying asset, which facilitates option pricing. The empirical results show that the proposed model offers greater economic benefit with reduced pricing errors than the traditional benchmark models, including the popular HNGARCH model of Heston and Nandi (2000), GARV model of Christoffersen et al. (2014), and BPJVM model of Christoffersen et al. (2015). Our finding is important for financial risk management and investment in Chinese derivatives market.

Suggested Citation

  • Pan, Zhiyuan & Shuai, Jiangyu & Liang, Zhilei & Sun, Xianchao, 2022. "Jump dynamics, spillover effect and option valuation," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000687
    DOI: 10.1016/j.najef.2022.101717
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    References listed on IDEAS

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    4. Zhiyuan Pan & Yudong Wang & Li Liu, 2021. "Realized bipower variation, jump components, and option valuation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 1933-1958, December.
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    More about this item

    Keywords

    Option valuation; Spillover effect; Jump process; 50 ETF options;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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