Short Maturity Options and Jump Memory: An Empirical Analysis

40 Pages Posted: 26 Nov 2002

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Adam Schwartz

Washington and Lee University - Department of Business Administration

Date Written: October 23, 2002

Abstract

We investigate "Jump Memory" using an extensive data base of short-term S&P 500 Index options. Jump memory refers to the attenuation of the jump intensity and magnitude parameters following a jump event. Behavioral and rational explanations for this phenomenon are posited. The pricing accuracy of the jump-diffusion model under parameter restrictions is also investigated. A restricted version of the model simplifies estimation, does not appear to degrade pricing accuracy, and permits clearer identification of components of jump memory. Further, a genetic algorithm is shown to be both robust and to produce parameter estimates that significantly improve pricing performance vis a' vis pricing performance when parameters are estimated by a gradient search technique.

Keywords: options, jump-memory, jump-diffusions, SPX, genetic

JEL Classification: G13, G14

Suggested Citation

Arnold, Thomas M. and Hilliard, Jimmy E. and Schwartz, Adam, Short Maturity Options and Jump Memory: An Empirical Analysis (October 23, 2002). Available at SSRN: https://ssrn.com/abstract=346547 or http://dx.doi.org/10.2139/ssrn.346547

Thomas M. Arnold

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Jimmy E. Hilliard (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-7676 (Phone)
225-578-6366 (Fax)

Adam Schwartz

Washington and Lee University - Department of Business Administration ( email )

Lexington, VA 24450
United States

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