Working Paper: NBER ID: w8510
Authors: Torben G. Andersen; Luca Benzoni; Jesper Lund
Abstract: This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices.
Keywords: stochastic volatility; jumps; equity returns; option pricing
JEL Codes: G12; C50; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stochastic volatility + discrete jumps (C69) | equity index returns (G12) |
| stochastic volatility (C58) | return and volatility innovations (G17) |
| jumps (Y60) | equity index returns (G12) |
| negative correlation between return and volatility innovations (C58) | skewness in SP500 returns (C46) |
| equity index returns (G12) | option prices (G13) |