Good jump,bad jump,and option valuation |
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| Authors: | Xinglin Yang |
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| Affiliation: | Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu, China |
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| Abstract: | I develop a new class of closed‐form option pricing models that incorporate variance risk premium and symmetric or asymmetric double exponential jump diffusion. These models decompose the jump component into upward and downward jumps using two independent exponential distributions and thus capture the impact of good and bad news on asset returns and option prices. The empirical results show that the model with an asymmetric double exponential jump diffusion improves the fit on Shanghai Stock Exchange 50ETF returns and options and provides relatively better in‐ and out‐of‐sample pricing performance. |
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| Keywords: | downward jump GARCH option valuation upward jump variance‐dependent pricing kernel |
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