The Informational Content of High-Frequency Option Prices
74 Pages Posted: 30 May 2017 Last revised: 15 Jun 2019
Date Written: June 14, 2019
We propose the realized option variance as an observable variable to summarize the information from high-frequency option prices. Using empirical parametric and nonparametric studies, this paper documents the incremental information offered by this realized measure. We find that this variable contains additional information on future index variability and is useful to predict risk premiums. In a parametric study, 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
JEL Classification: C52, C55, C58, C63
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