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Model specification of conditional jump intensity: Evidence from S&P 500 returns and option prices

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  • Cheng, Hung-Wen
  • Lo, Chien-Ling
  • Tsai, Jeffrey Tzuhao

Abstract

This study investigates the model specification of the conditional jump intensity under option pricing models having a generalized autoregressive conditional heteroskedastic with jumps (GARCH-jump). We compare three GARCH-jump models of Chang, Chang, Cheng, Peng, and Tseng (2018) to examine whether specifying asymmetric jumps in conditional jump intensity can improve the empirical performance. The empirical results from S&P 500 returns and options show that specifying the asymmetric jumps into the conditional jump intensity does improve the in-sample pricing errors and implied volatility errors. However, the out-of-sample results depend on the error measurement.

Suggested Citation

  • Cheng, Hung-Wen & Lo, Chien-Ling & Tsai, Jeffrey Tzuhao, 2020. "Model specification of conditional jump intensity: Evidence from S&P 500 returns and option prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940818303772
    DOI: 10.1016/j.najef.2018.08.024
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