Jump Contagion among Stock Market Indices: Evidence from Option Markets

tinbergen Institute Discussion Paper 2021-086/III

66 Pages Posted: 28 Sep 2021 Last revised: 2 Feb 2022

See all articles by H. Peter Boswijk

H. Peter Boswijk

Amsterdam School of Economics; Tinbergen Institute

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

Andrei Lalu

University of Amsterdam - Amsterdam School of Economics (ASE); Tinbergen Institute

Evgenii Vladimirov

University of Amsterdam - Amsterdam School of Economics (ASE); Tinbergen Institute

Date Written: September 23, 2021

Abstract

This paper explores the contagious propagation of jumps among international stock
market indices by exploiting a rich panel of stock and options data. We propose a multivariate option pricing model designed to allow for, but not superimpose, time and space amplification of jumps in option markets. We develop a semi-parametric estimation procedure employing a continuum of moments conditions in GMM with implied states. We introduce a partial-information approach to reduce the computational complexity arising in the multivariate setting, derive the asymptotic properties of our estimators, and analyze their finite-sample performance. Our empirical results reveal evidence of jump contagion in option markets, both from the US to Europe and vice versa, with the US leading the UK and standing on equal footing with Germany. We illustrate the importance of capturing jump contagion for risk management, option pricing, and scenario analysis.

Keywords: Jumps, Option markets, Crisis, Transmission, Spatio-temporal models, C-GMM

JEL Classification: C58, G01, G15

Suggested Citation

Boswijk, H. Peter and Laeven, Roger Jean Auguste and Lalu, Andrei and Vladimirov, Evgenii, Jump Contagion among Stock Market Indices: Evidence from Option Markets (September 23, 2021). tinbergen Institute Discussion Paper 2021-086/III, Available at SSRN: https://ssrn.com/abstract=3929515 or http://dx.doi.org/10.2139/ssrn.3929515

H. Peter Boswijk (Contact Author)

Amsterdam School of Economics ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profile/h.p.boswijk

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

Andrei Lalu

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profile/a.lalu

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://www.uva.nl/profile/a.lalu

Evgenii Vladimirov

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

Tinbergen Institute ( email )

Amsterdam
Netherlands

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