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Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options

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  • Christoffersen, Peter
  • Jacobs, Kris
  • Ornthanalai, Chayawat

Abstract

We build a new class of discrete-time models that are relatively easy to estimate using returns and/or options. The distribution of returns is driven by two factors: dynamic volatility and dynamic jump intensity. Each factor has its own risk premium. The models significantly outperform standard models without jumps when estimated on S&P500 returns. We find very strong support for time-varying jump intensities. Compared to the risk premium on dynamic volatility, the risk premium on the dynamic jump intensity has a much larger impact on option prices. We confirm these findings using joint estimation on returns and large option samples.

Suggested Citation

  • Christoffersen, Peter & Jacobs, Kris & Ornthanalai, Chayawat, 2012. "Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options," Journal of Financial Economics, Elsevier, vol. 106(3), pages 447-472.
    • Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:447-472
    DOI: 10.1016/j.jfineco.2012.05.017
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    More about this item

    Keywords

    Compound Poisson jumps; Analytical filtering; Fat tails; Risk premiums;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options (JFE 2012) in ReplicationWiki

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