The Pricing of Jump Propagation: Evidence from Spot and Options Markets
Management Science, Forthcoming
64 Pages Posted: 29 Jun 2017
Date Written: June 27, 2017
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: Suggested Citation