Integrated Time-Series Analysis of Spot and Option Prices

55 Pages Posted: 30 Nov 1999

See all articles by Jun Pan

Jun Pan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)

Date Written: November 28, 1999

Abstract

This paper examines the joint time series of the S&P 500 index and near-the-money short-dated option prices with an arbitrage-free model, capturing both stochastic volatility and jumps. Jump-risk premia uncovered from the joint data respond quickly to market volatility, becoming more prominent during volatile markets. This form of jump-risk premia is important not only in reconciling the dynamics implied by the joint data, but also in explaining the volatility "smirks" of cross-sectional options data. Further diagnostic tests suggest a stochastic-volatility model with two factors --- one strongly persistent, the other quickly mean-reverting and highly volatile.

JEL Classification: C22, C32, G12, G13

Suggested Citation

Pan, Jun, Integrated Time-Series Analysis of Spot and Option Prices (November 28, 1999). AFA 2001 New Orleans Meetings, Available at SSRN: https://ssrn.com/abstract=196808 or http://dx.doi.org/10.2139/ssrn.196808

Jun Pan (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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