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Asymmetry in the jump-size distribution of the S&P 500: Evidence from equity and option markets |
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| Authors: | Andreas Kaeck |
| Institution: | 1. Catholic University of Milan, Italy;2. University of Bologna, Department of Statistics, Viale Filopanti 5, 40126 Bologna, Italy;1. School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 120-749, Republic of Korea;2. Department of Economics, Louisiana State University, 2322 Business Education Complex, Baton Rouge, LA 70803, USA;1. Nomura International Plc., 1 Angel Lane, London EC4R 3AB, UK;2. International Monetary Fund, Research Department, 700, 19th Street NW, Washington DC 20431, USA;3. University of Oxford, Oxford Centre for the Analysis of Resource-Rich Economies, Oxford, UK;4. University of Oxford, Mathematical Institute, 24–29 St Giles, Oxford OX1 3LB, UK;5. Oxford-Man Institute of Quantitative Finance, University of Oxford, Eagle House, Walton Well Road, Oxford OX2 6ED, UK |
| Abstract: | This paper studies alternative distributions for the size of price jumps in the S&P 500 index. We introduce a range of new jump-diffusion models and extend popular double-jump specifications that have become ubiquitous in the finance literature. The dynamic properties of these models are tested on both a long time series of S&P 500 returns and a large sample of European vanilla option prices. We discuss the in- and out-of-sample option pricing performance and provide detailed evidence of jump risk premia. Models with double-gamma jump size distributions are found to outperform benchmark models with normally distributed jump sizes. |
| Keywords: | Jump-size distribution European options S&P 500 Model calibration |
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