Time-Varying Jump Intensities and Fat Tail Dynamics: Evidence from S&P500 Returns and Options

49 Pages Posted: 7 Dec 2013

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: May 19, 2010

Abstract

We present a new discrete-time GARCH jump framework that allows for rich dynamics in higher moments by combining heteroskedastic processes with fat-tailed innovations in returns and volatility. We provide a tractable risk neutralization framework allowing for option valuation with separate modeling of risk premia for the jump and normal innovations. Our models can be estimated with ease on returns using standard maximum likelihood techniques, and joint estimation on returns and a large sample of options is also feasible. We …find very strong empirical support for time-varying jump intensities, when estimating on S&P500 returns and on returns and options jointly.

Keywords: compound Poisson, fi…ltering, jumps, fat tails, risk premia

JEL Classification: G13

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Ornthanalai, Chayawat, Time-Varying Jump Intensities and Fat Tail Dynamics: Evidence from S&P500 Returns and Options (May 19, 2010). Rotman School of Management Working Paper No. 2360737. Available at SSRN: https://ssrn.com/abstract=2360737 or http://dx.doi.org/10.2139/ssrn.2360737

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)

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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