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What's Beneath the Surface? Option Pricing with Multifrequency Latent States


Calvet, Laurent; Fisher, Adlai; Leippold, Markus (2013). What's Beneath the Surface? Option Pricing with Multifrequency Latent States. HEC Paris Research Paper 969/2013, University of Zurich.

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:28 Jan 2014 16:57
Last Modified:08 Aug 2017 07:15
Series Name:HEC Paris Research Paper
Free access at:Official URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.1016/j.jeconom.2015.02.034
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2171734
Other Identification Number:merlin-id:8836

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