Dynamic jump intensities and risk premiums: evidence from SandP500 returns and options

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 mode...

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Bibliographic Details
Published in:Journal of financial economics 2012-12, Vol.106 (3), p.447-472
Main Authors: Christoffersen, P, Jacobs, K, Ornthanalai, C
Format: Article
Language:English
Subjects:
Dynamics
Economic models
Estimation
Risk
Time
Volatility
Online Access:Get full text
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Summary: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. All rights reserved, Elsevier
ISSN:0304-405X
DOI:10.1016/j.jfineco.2012.05.017