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The role of time-varying jump risk premia in pricing stock index options

  • Yun, Jaeho
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    This paper examines out-of-sample option pricing performances for the affine jump diffusion (AJD) models by using the S&P 500 stock index and its associated option contracts. In particular, we investigate the role of time-varying jump risk premia in the AJD specifications. Our empirical analysis shows strong evidence in favor of time-varying jump risk premia in pricing cross-sectional options. We also find that, during a period of low volatility, the role of jump risk premia becomes less pronounced, making the differences across pricing performances of the AJD models not as substantial as during a period of high volatility. This finding can possibly explain poor pricing perfomances of the sophisticated AJD models in some previous studies whose sample periods can be characterized by low volatility.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927539811000478
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    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 5 ()
    Pages: 833-846

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    Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:833-846
    Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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