On the relationship between conditional jump intensity and diffusive volatility |
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| Institution: | 1. Hong Kong Polytechnic University, Hong Kong, China;2. Hong Kong University of Science and Technology, Hong Kong, China;1. Department of Economics, University of Bologna, Piazza Scaravilli, 2, Bologna 40126, Italy;2. Rimini Centre for Economic Analysis, Rimini, Italy;3. Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK;4. Department of Finance, Accounting and Economics, Frederick University, Mariou Agathagelou 18, Limassol, Cyprus;1. Cass Business School and Centre for Economic Policy Research (CEPR), London, UK;2. Institute of Finance, University of Lugano, Via Buffi 13, CH-6900 Lugano, Switzerland;3. Department of Finance, Copenhagen Business School, DK-2000 Frederiksberg, Denmark;1. Queens College, CUNY, 65-30 Kissena Blvd., Flushing, NY 11367, USA;2. CEMFI, Casado del Alisal 5, E-28014 Madrid, Spain;1. The Smeal College of Business, The Pennsylvania State University, 322 Business Building, University Park, State College, 16801, Pennsylvania, USA;2. Department of Finance, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, P.Q., H3G 1M8, Canada;1. School of Demography, The Australian National University, ACT 2601, Australia;2. Research School of Finance, Actuarial Studies and Statistics, The Australian National University, ACT 2601, Australia |
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| Abstract: | In standard options pricing models that include jump components to capture large price changes, the conditional jump intensity is typically specified as an increasing function of the diffusive volatility. We conduct model-free estimation and tests of the relationship between jump intensity and diffusive volatility. Simulation analysis confirms that the tests have power to reject the null hypothesis of no relationship if data are generated with the relationship. Applying the method to a few stock indexes and individual stocks, however, we find little evidence that jump intensity positively depends on diffusive volatility as a general property of the jump intensity. The findings of the paper give impetus to improving the specification of jump dynamics in options pricing models. |
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