The jump-risk premia implicit in options: Evidence from an integrated time-series study

Journal of Financial Economics

Volumn 63, Issue 1, 2002, Pages 3-50

  Pan, Jun ^a  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

Author keywords

Implied state generalized method of moments; Jump risk premium; Option pricing; Stochastic volatility; Volatility "smiles" and "smirks"

Indexed keywords

EID: 10644241710     PISSN: 0304405X     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0304-405X(01)00088-5     Document Type: Article

References (64)

1. Aït-Sahalia, Y., Lo, A., 2000. Nonparametric risk management and implied risk aversion. Journal of Econometrics 94, 9-51.
2. Aït-Sahalia, Y., Wang, Y., Yared, F., 2001. Do option markets correctly price the probabilities of movement of the underlying asset?. Journal of Econometrics 102, 67-110.
3. Alizadeh, S., Brandt, M., Diebold, F., 2001. High- and low-frequency exchange rate volatility dynamics: range-based estimation of stochastic volatility models. Working paper, Wharton School, University of Pennsylvania.
4. Andersen, T., Benzoni, L., Lund, J., 1998. Estimating jump-diffusions for equity returns. Working paper, Kellogg Graduate School of Management, Northwestern University.
5. Andersen, T., Bollerslev, T., Diebold, F., Ebens, H., 2001. The distribution of stock return volatility. Journal of Financial Economics 61.
6. Andersen, T., Bollerslev, T., Diebold, F., Labys, P., 2000. The distribution of realized exchange rate volatility. Journal of the American Statistical Association, forthcoming.
7. Andrews, D.W.K., 1987. Consistency in nonlinear econometric models: a generic uniform law of large numbers. Econometrica 55, 1465-1471.
8. Bakshi, G., Cao, C., Chen, Z., 1997. Empirical performance of alternative option pricing models. Journal of Finance 52, 2003-2049.
9. Bakshi, G., Kapadia, N., 2001. Delta-hedged gains and the pricing of volatility risk. Working paper, University of Massachusetts, Amherst.
10. Bakshi, G., Madan, D., 2000. Spanning and derivative-security valuation. Journal of Financial Economics 55, 205-238.
11. Bates, D., 2000. Post-'87 crash fears in s&p 500 futures options. Journal of Econometrics 94, 181-238.
12. Benzoni, L., 1998. Pricing options under stochastic volatility: an econometric analysis. Working paper, Kellog Graduate School of Management, Northwestern University.
13. Black, F., 1976. Studies of stock price volatility changes. Proceedings of the 1976 Meetings of the Business and Economics Statistics Section, American Statistical Association, pp. 177-181.
14. Black, F., Scholes, M., 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81, 637-654.
15. Bollerslev, T., Mikkelsen, H.O., 1996. Modeling and pricing long memory in stock market volatility. Journal of Econometrics 73, 151-184.
16. Brandt, M., Santa-Clara, P., 2001. Simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets. Journal of Financial Economics, forthcoming.
17. Brémaud, P., 1981. Point Processes and Queues, Martingale Dynamics. Springer, New York.
18. Chernov, M., Gallant, R., Ghysels, E., Tauchen, G., 1999. A new class of stochastic volatility models with jumps: theory and estimation. Working paper, Columbia University, University of North Carolina, and Duke University.
19. Chernov, M., Gallant, R., Ghysels, E., Tauchen, G., 2000. Alternative models for stock price dynamics. Working paper, Columbia University, University of North Carolina, and Duke University.
20. Chernov, M., Ghysels, E., 2000. A study towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation. Journal of Financial Economics 56, 407-458.
21. Cox, J.C., Ingersoll, J.E., Ross, S.A., 1985. A theory of the term structure of interest rates. Econometrica 53 (2), 385-407.
22. Das, S.R., Sundaram, R.K., 1999. Of smiles and smirks: a term structure perspective. Journal of Financial and Quantitative Analysis 34, 211-240.
23. Davies, R., 1973. Numerical inversion of a characteristic function. Biometrika 60, 415-417.
24. Detemple, J., Selden, L., 1991. A general equilibrium analysis of option and stock market interactions. International Economic Review 32, 279-303.
25. Doob, J., 1953. Stochastic Processes. Wiley, New York.
26. Duffie, D., Pan, J., Singleton, K., 2000. Transform analysis and asset pricing for affine jump-diffusions. Econometrica 68, 1343-1376.
27. Duffie, D., Singleton, K., 1993. Simulated moments estimation of markov models of asset prices. Econometrica 61, 929-952.
28. Duffie, D., Singleton, K., 1999. Modeling term structure of defaultable bonds. Review of Financial Studies 12, 687-720.
29. Eichenbaum, M.S., Hansen, L.P., Singleton, K.J., 1988. A time series analysis of representative agent models of consumption and leisure choice under uncertanity. Quarterly Journal of Economics 103, 51-78.
30. Eraker, B., 2000. Do stock prices and volatility jump? reconciling evidence from spot and option prices. Working paper, Graduate School of Business, University of Chicago.
31. Eraker, B., Johannes, M.S., Polson, N.G., 2000. The impact of jumps in returns and volatility. Working paper, University of Chicago.
32. Feller, W., 1951. Two singular diffusion problems. Annals of Mathematics 54, 173-182.
33. Gallant, A.R., Tauchen, G., 1998. Reprojecting partially observed systems with application to interest rate diffusions. Journal of American Statistical Association 93, 10-24.
34. Gallant, A.R., White, H. 1988. A Unified Theory of Estimation and Inference for Nonlinear Dynamic Models. Blackwell Basil.
35. Gul, F., 1991. A theory of disappointment aversion. Econometrica 59, 667-686.
36. Guo, D., 1998. The risk premium of volatility implicit in currency options. Journal of Business and Economics Statistics 16, 498-507.
37. Hamilton, J., 1994. Time Series Analysis. Princeton University Press, Princeton.
38. Hansen, L.P., 1982. Large sample properties of generalized method of moments estimators. Econometrica 50, 1029-1054.
39. Hansen, L.P., 1985. A method for calculating bounds on the asymptotic covariance matrices of generalized method of moments estimators. Journal of Econometrics 30, 203-238.
40. Harvey, C.R., Siddique, A., 2000. Conditional skewness in asset pricing tests. Journal of Finance 55, 1263-1295.
41. Heston, S., 1993. A closed-form solution of options with stochastic volatility with applications to bond and currency options. The Review of Financial Studies 6, 327-343.
42. Hull, J., White, A., 1987. The pricing of options on assets with stochastic volatilities. Journal of Finance 42, 281-300.
43. Jackwerth, J.C., 2000. Recovering risk aversion from options prices and realized returns. Review of Financial Studies 13, 433-451.
44. Jackwerth, J.C., Rubinstein, M., 1996. Recovering probability distributions from option prices. Journal of Finance 51, 1611-1631.
45. Johannes, M., Kumar, R., Polson, N., 1998. Jump diffusion models: extracting jumps from equity indices. Working paper, Graduate School of Business, University of Chicago.
46. Jones, C., 1999. The dynamics of stochastic volatility. Working paper, Simon School of Business, University of Rochester.
47. Jorion, P., 1989. On jump processes in the foreign exchange and stock markets. Review of Financial Studies 4, 427-445.
48. Kraus, A., Litzenberger, R., 1976. Skewness preference and the valuation of risk assets. The Journal of Finance 31, 1085-1100.
49. Liu, J., 1997. Generalized method of moments estimation of affine diffusion processes. Working paper, Graduate School of Business, Stanford University.
50. Liu, J., Longstaff, F., Pan, J., 2001. Dynamic asset allocation with event risk. Working paper, UCLA Anderson School and MIT Sloan School.
51. Lucas, R.E., 1978. Asset prices in an exchange economy. Econometrica 46, 1429-1445.
52. Naik, V., Lee, M., 1990. General equilibrium pricing of options on the market portfolio with discontinuous returns. Review of Financial Studies 3, 493-521.
53. Pan, J., 2000. Jump-Diffusion Models of Asset Prices: Theory and Empirical Evidence. Ph. D. Thesis, Graduate School of Business, Stanford University.
54. Pastrorello, S., Renault, E., Touzi, N., 1996. Statistical inference for random variance option pricing. Working paper, Dipartimento di Scienze Economiche, Università di Bologna, Italy.
55. Pham, H., Touzi, N., 1996. Equilibrium state prices in a stochastic volatility model. Mathematical Finance 6, 215-236.
56. Poteshman, A.M., 1998. Estimating a genral stochastic variance model from options prices. Working paper, Department of Finance, University of Illinois at Urbana-Champaign.
57. Protter, P., 1990. Stochastic Integration and Differential Equations. Springer, New York.
58. Renault, E., Touzi, N., 1996. Option hedging and implied volatilities in a stochastic volatility model. Mathematical Finance 6, 279-302.
59. Rosenberg, J., Engle, R., 1999. Empirical pricing kernels. Working paper, Stern School of Business, New York University.
60. Rubinstein, M., 1973. The fundamental theorem of parameter-preference security valuation. Journal of Financial and Quantitative Analysis 8, 61-69.
61. Scott, L., 1997. Pricing stock options in a jump-diffusion model with stochastic volatility and interest rates: application of fourier inversion methods. Mathematical Finance 7, 345-358.
62. Singleton, K., 2001. Estimation of affine asset pricing models using the empirical characteristic function. Journal of Econometrics 102, 111-141.
63. Stein, E., Stein, J., 1991. Stock price distributions with stochastic volatility: an analytic approach. Review of Financial Studies 4, 725-752.
64. Stein, J., 1989. Overreactions in the options market. Journal of Finance 44, 1011-1023.