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Jump and Volatility Dynamics for the S&P 500: Evidence for Infinite-Activity Jumps with Non-Affine Volatility Dynamics from Stock and Option Markets

34 Pages Posted: 9 Jun 2015 Last revised: 12 Jan 2016

Hanxue Yang

Tampere University of Technology

Juho Kanniainen

Tampere University of Technology

Date Written: January 12, 2016

Abstract

Relatively little is known about the empirical performance of infinite-activity Levy jump models, especially with non-affine volatility dynamics. We use extensive empirical data sets to study how infinite-activity Variance Gamma and Normal Inverse Gaussian jumps with affine and non-affine volatility dynamics improve goodness of fit and option pricing performance. With Markov Chain Monte Carlo, different model specifications are estimated using the joint information of the S&P 500 index and the VIX. Our paper provides clear evidence that a parsimonious non-affine model with Normal Inverse Gaussian return jumps and a linear variance specification is particularly competitive, even during the recent crisis.

Keywords: Infinite-activity Levy jumps, Non-affine models, MCMC, VIX, Options

JEL Classification: C13, C32, G13

Suggested Citation

Yang, Hanxue and Kanniainen, Juho, Jump and Volatility Dynamics for the S&P 500: Evidence for Infinite-Activity Jumps with Non-Affine Volatility Dynamics from Stock and Option Markets (January 12, 2016). Available at SSRN: https://ssrn.com/abstract=2616243 or http://dx.doi.org/10.2139/ssrn.2616243

Hanxue Yang (Contact Author)

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

Juho Kanniainen

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

HOME PAGE: http://https://sites.google.com/site/juhokanniainen/

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