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Extracting Latent States from High Frequency Option Prices

76 Pages Posted: 30 May 2017  

Diego Amaya

Wilfrid Laurier University

Jean-François Bégin

Simon Fraser University

Geneviève Gauthier

HEC Montreal - Department of Decision Sciences; HEC Montreal - Department of Management Sciences

Date Written: May 26, 2017

Abstract

We propose the realized option variance as a new observable variable to integrate high frequency option prices in the inference of option pricing models. Using simulation and empirical studies, this paper documents the incremental information offered by this realized measure. Our empirical results show that the information contained in the realized option variance improves the inference of model variables such as the instantaneous variance and variance jumps of the S&P 500 index. Parameter estimates indicate that the risk premium breakdown between jump and diffusive risks is affected by the omission of this information.

Keywords: High frequency data, realized option variance, options, jump-diffusions, particle filter

JEL Classification: C52, C55, C58, C63

Suggested Citation

Amaya, Diego and Bégin, Jean-François and Gauthier, Geneviève, Extracting Latent States from High Frequency Option Prices (May 26, 2017). Available at SSRN: https://ssrn.com/abstract=2975355

Diego Amaya

Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada

Jean-François Bégin

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.sfu.ca/~jbegin

Genevieve Gauthier (Contact Author)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada

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