Jump dynamics,spillover effect and option valuation |
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Affiliation: | 1. College of Business Administration, University of Ulsan, Ulsan, Republic of Korea;2. College of Business, Korea Advanced Institute of Science and Technology, Seoul, Republic of Korea;3. Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea |
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Abstract: | In this paper, we propose an affine discrete-time model that incorporates the jump process and spillover effect for valuing the 50 ETF options in China. Based on the proposed model, a closed-form solution is also derived for the new dynamics of underlying asset, which facilitates option pricing. The empirical results show that the proposed model offers greater economic benefit with reduced pricing errors than the traditional benchmark models, including the popular HNGARCH model of Heston and Nandi (2000), GARV model of Christoffersen et al. (2014), and BPJVM model of Christoffersen et al. (2015). Our finding is important for financial risk management and investment in Chinese derivatives market. |
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Keywords: | Option valuation Spillover effect Jump process 50 ETF options |
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