Dynamic Jump Intensities and Risk Premia: Evidence from S&P500 Returns and Options

Journal of Financial Economics, Forthcoming.

EFA 2008 Athens Meetings Paper

AFA 2010 Atlanta Meetings Paper

51 Pages Posted: 7 Mar 2008 Last revised: 22 Jan 2012

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Chayawat Ornthanalai

University of Toronto - Rotman School of Management

Date Written: September 23, 2011

Abstract

We build a new class of discrete time models where the distribution of daily returns is driven by two factors: dynamic volatility and dynamic jump intensity. Each factor has its own risk premium. The likelihood function for the models is available using analytical filtering, which makes them much easier to implement than most existing models. Estimating the models on S&P500 returns, we find that they significantly outperform standard models without jumps. We find very strong empirical support for time-varying jump intensities, and thus for flexible skewness and kurtosis dynamics. Compared to the risk premium on dynamic volatility, the risk premium on the dynamic jump intensity has a much larger impact on option prices. We confirm these findings using joint estimation on returns and large option samples, which is feasible in our class of models.

Keywords: compound Poisson process, option valuation, filtering, volatility jumps, jump risk premia, time-varying jump intensity, heteroskedasticity

JEL Classification: G12

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Ornthanalai, Chayawat, Dynamic Jump Intensities and Risk Premia: Evidence from S&P500 Returns and Options (September 23, 2011). EFA 2008 Athens Meetings Paper; Journal of Financial Economics, Forthcoming.; EFA 2008 Athens Meetings Paper; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1101733 or http://dx.doi.org/10.2139/ssrn.1101733

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Chayawat Ornthanalai

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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