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Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options

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Author Info

  • Christoffersen, Peter
  • Jacobs, Kris
  • Ornthanalai, Chayawat

Abstract

We build a new class of discrete-time models that are relatively easy to estimate using returns and/or options. The distribution of returns is driven by two factors: dynamic volatility and dynamic jump intensity. Each factor has its own risk premium. The models significantly outperform standard models without jumps when estimated on S&P500 returns. We find very strong support for time-varying jump intensities. Compared to the risk premium on dynamic volatility, the risk premium on the dynamic jump intensity has a much larger impact on option prices. We confirm these findings using joint estimation on returns and large option samples.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 3 ()
Pages: 447-472

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:447-472

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Compound Poisson jumps; Analytical filtering; Fat tails; Risk premiums;

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References

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Cited by:
  1. Corsi, Fulvio & Fusari, Nicola & La Vecchia, Davide, 2013. "Realizing smiles: Options pricing with realized volatility," Journal of Financial Economics, Elsevier, vol. 107(2), pages 284-304.

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