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What is beneath the surface? Option pricing with multifrequency latent states


Calvet, Laurent; Fearnley, Marcus; Fisher, Adlai; Leippold, Markus (2015). What is beneath the surface? Option pricing with multifrequency latent states. Journal of Econometrics, 187(2):498-511.

Abstract

We introduce a tractable class of non-ane price processes with multifrequency stochastic volatil- ity and jumps. The specications require few xed parameters and deliver fast option pricing. One key ingredient is a tight link between jumps and volatility regimes, as asset pricing theory suggests. Empirically, the model matches implied volatility surfaces and their dynamics with- out requiring parameter recalibration. A variety of metrics show improvements over traditional benchmarks in- and out-of-sample.

Abstract

We introduce a tractable class of non-ane price processes with multifrequency stochastic volatil- ity and jumps. The specications require few xed parameters and deliver fast option pricing. One key ingredient is a tight link between jumps and volatility regimes, as asset pricing theory suggests. Empirically, the model matches implied volatility surfaces and their dynamics with- out requiring parameter recalibration. A variety of metrics show improvements over traditional benchmarks in- and out-of-sample.

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1 citation in Web of Science®
1 citation in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:August 2015
Deposited On:06 Aug 2015 09:38
Last Modified:05 Apr 2016 19:20
Publisher:Elsevier
ISSN:0304-4076
Publisher DOI:https://doi.org/10.1016/j.jeconom.2015.02.034
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2171734 (Organisation)
Other Identification Number:merlin-id:10081

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