The Pricing of Jump Propagation: Evidence from Spot and Options Markets

Management Science, Forthcoming

64 Pages Posted: 29 Jun 2017

See all articles by Du Du

Du Du

Hong Kong University of Science & Technology (HKUST)

Dan Luo

School of Finance, Shanghai University of Finance and Economics

Date Written: June 27, 2017

Abstract

This paper examines the joint time series of the S&P500 index and its options with a two-factor Hawkes jump-diffusion model that captures jump propagation (i.e., the phenomenon in which the strike of one jump substantially raises the probability for more to follow). The propagation effect uncovered from the joint data is severe but short-lived. On average, this component takes up more than two-thirds of the total jump risks. Our jump specification proves crucial not only in reconciling the dynamics implied from the joint data but also in explaining the time series of option-implied volatility skew.

Keywords: Jump Propagation, Joint Pricing, Option Skew

JEL Classification: G01, G11, G13

Suggested Citation

Du, Du and Luo, Dan, The Pricing of Jump Propagation: Evidence from Spot and Options Markets (June 27, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2994580

Du Du (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Dan Luo

School of Finance, Shanghai University of Finance and Economics ( email )

Shanghai, 200433
China
+86-21-65904920 (Phone)

HOME PAGE: http://sof.shufe.edu.cn/80/46/c6894a98374/page.htm

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
102
Abstract Views
538
rank
274,770
PlumX Metrics