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Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices

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  • Eraker, Bjorn
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    Abstract

    This paper studies the empirical performance of jump-diffusion models that allow for stochastic volatility and correlated jumps affecting both prices and volatility. The results show that the models in question provide reasonable fit to both option prices and returns data in the in-sample estimation period. This contrasts with previous findings where stochastic volatility paths are found to be too smooth relative to the option implied dynamics. While the models perform well during the high volatility estimation period, they tend to overprice long dated contracts out-of-sample. This evidence points towards a too simplistic specification of the mean dynamics of volatility.

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    File URL: http://www.econ.duke.edu/Papers/Abstracts02/abstract.02.23.html
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    Bibliographic Info

    Paper provided by Duke University, Department of Economics in its series Working Papers with number 02-23.

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    Date of creation: 2002
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    Handle: RePEc:duk:dukeec:02-23

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    Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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    Web page: http://econ.duke.edu/

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    Cited by:
    1. Paola Zerilli, 2007. "Option Pricing and Spikes in Volatility: Theoretical and Empirical Analysis," Discussion Papers 07/08, Department of Economics, University of York.

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