Short Maturity Options and Jump Memory: An Empirical Analysis
40 Pages Posted: 26 Nov 2002
Date Written: October 23, 2002
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
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