Short Maturity Options and Jump Memory: An Empirical Analysis
University of Richmond - E. Claiborne Robins School of Business
Jimmy E. Hilliard
Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration
Washington and Lee University - Department of Business Administration
October 23, 2002
We investigate "Jump Memory" using an extensive data base of short-term S&P 500 Index options. Jump memory refers to the attenuation of the jump intensity and magnitude parameters following a jump event. Behavioral and rational explanations for this phenomenon are posited. The pricing accuracy of the jump-diffusion model under parameter restrictions is also investigated. A restricted version of the model simplifies estimation, does not appear to degrade pricing accuracy, and permits clearer identification of components of jump memory. Further, a genetic algorithm is shown to be both robust and to produce parameter estimates that significantly improve pricing performance vis a' vis pricing performance when parameters are estimated by a gradient search technique.
Number of Pages in PDF File: 40
Keywords: options, jump-memory, jump-diffusions, SPX, genetic
JEL Classification: G13, G14working papers series
Date posted: November 26, 2002
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