Good Volatility, Bad Volatility and Option Pricing
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|Length:||48 pages Advances in variance analysis permit the splitting of the total quadratic variation of a jump diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of the asymmetry in stock price distributions. To appraise the economic gain of this decomposition, we design a new and flexible option pricing model in which the underlying asset price exhibits distinct upside and downside semi-variance dynamics driven by their model-free proxies. The new model outperforms common benchmarks, especially the alternative that splits the quadratic variation into diffusive and jump components.|
|Date of creation:||2017|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
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- Peter Christoffersen & Bruno Feunou & Kris Jacobs & Nour Meddahi, 2012. "The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation," Staff Working Papers 12-34, Bank of Canada.
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