The role of the variance premium in Jump-GARCH option pricing models

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dc.contributor.authorByun, Suk Joonko
dc.contributor.authorJeon, Byoung Hyunko
dc.contributor.authorMin, Byungsunko
dc.contributor.authorYoon, Sun-Joongko
dc.date.accessioned2016-04-20T06:22:07Z-
dc.date.available2016-04-20T06:22:07Z-
dc.date.created2015-10-19-
dc.date.created2015-10-19-
dc.date.issued2015-10-
dc.identifier.citationJOURNAL OF BANKING & FINANCE, v.59, pp.38 - 56-
dc.identifier.issn0378-4266-
dc.identifier.urihttp://hdl.handle.net/10203/205289-
dc.description.abstractWe develop a discrete-time option pricing model incorporating a variance-dependent pricing kernel of Christoffersen et al. (2013) under an economic framework allowing for dynamic volatility and jump intensity. Based on the model, we examine the role of the variance premium and jump risk premium in explaining S&P 500 index option prices and returns. According to the results, the variance premium is equally important as the jump risk premium in explaining the empirical option data. Whereas the incorporation of the jump risk premium improves the model fit on option prices, the incorporation of the variance premium improves the fit on option returns. In particular, the variance premium can explain both 1-month holding period returns of 2-month maturity straddles, which are significantly negative, and call returns, which decrease according to moneyness. The model incorporating the jump risk premium only has a limitation in explaining the above two stylized returns. The outperformance of the model incorporating the variance premium on option returns stems from its ability to capture the wedge between physical and risk-neutral volatilities.-
dc.languageEnglish-
dc.publisherELSEVIER SCIENCE BV-
dc.subjectRISK-AVERSION-
dc.subjectSTOCHASTIC VOLATILITY-
dc.subjectCONDITIONAL HETEROSKEDASTICITY-
dc.subjectSTOCK RETURNS-
dc.subjectASSET PRICES-
dc.subjectMARKET-
dc.subjectVALUATION-
dc.subjectDYNAMICS-
dc.subjectIMPLICIT-
dc.subjectSPECIFICATION-
dc.titleThe role of the variance premium in Jump-GARCH option pricing models-
dc.typeArticle-
dc.identifier.wosid000361582700004-
dc.identifier.scopusid2-s2.0-84943619575-
dc.type.rimsART-
dc.citation.volume59-
dc.citation.beginningpage38-
dc.citation.endingpage56-
dc.citation.publicationnameJOURNAL OF BANKING & FINANCE-
dc.identifier.doi10.1016/j.jbankfin.2015.05.009-
dc.contributor.localauthorByun, Suk Joon-
dc.contributor.nonIdAuthorMin, Byungsun-
dc.contributor.nonIdAuthorYoon, Sun-Joong-
dc.type.journalArticleArticle-
dc.subject.keywordAuthorVariance premium-
dc.subject.keywordAuthorVariance-dependent pricing kernel-
dc.subject.keywordAuthorJump risk premium-
dc.subject.keywordAuthorS&amp-
dc.subject.keywordAuthorP 500 index options-
dc.subject.keywordAuthorJump-GARCH option pricing models-
dc.subject.keywordPlusRISK-AVERSION-
dc.subject.keywordPlusSTOCHASTIC VOLATILITY-
dc.subject.keywordPlusCONDITIONAL HETEROSKEDASTICITY-
dc.subject.keywordPlusSTOCK RETURNS-
dc.subject.keywordPlusASSET PRICES-
dc.subject.keywordPlusMARKET-
dc.subject.keywordPlusVALUATION-
dc.subject.keywordPlusDYNAMICS-
dc.subject.keywordPlusIMPLICIT-
dc.subject.keywordPlusSPECIFICATION-
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