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

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  • Eraker, Bjorn

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.

Suggested Citation

  • Eraker, Bjorn, 2002. "Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices," Working Papers 02-23, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:02-23
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    Cited by:

    1. Paola Zerilli, 2005. "Option pricing and spikes in volatility: theoretical and empirical analysis," Money Macro and Finance (MMF) Research Group Conference 2005 76, Money Macro and Finance Research Group.
    2. Jow-Ran Chang & Mao-Wei Hung & Cheng Few Lee & Hsin-Min Lu, 2020. "The Jump Behavior of a Foreign Exchange Market: Analysis of the Thai Baht," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 52, pages 1943-1968, World Scientific Publishing Co. Pte. Ltd..
    3. Michael S. Johannes & Nicholas G. Polson & Jonathan R. Stroud, 2009. "Optimal Filtering of Jump Diffusions: Extracting Latent States from Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2559-2599, July.

    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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