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An Empirical Investigation of Continuous-Time Equity Return Models

  • Torben G. Andersen

    (Kellogg Graduate School of Management, Northwestern University and the NBER,)

  • Luca Benzoni

    (Carlson School of Management, University of Minnesota,)

  • Jesper Lund

    (Nykredit Bank, Denmark)

This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 3 (06)
Pages: 1239-1284

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:3:p:1239-1284
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