Empirical Performance of Alternative Option Pricing Models

Bakshi, Gurdip; Cao, Charles; Chen, Zhiwu

doi:10.1111/j.1540-6261.1997.tb02749.x

Cited by 1,764 publications

(1,300 citation statements)

References 47 publications

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“…Model-implied risk premia allow us to assess the plausibility of our parameter estimates comparing the P and Q measures: Bates (1991) and Bakshi, Cao, and Chen (1997) formulate a simple criterion to check whether a model implies reasonable risk preferences in its generalequilibrium translation -the estimated risk premia should be close to zero. Though there exist large extreme premia of -4 and 50 times the corresponding spread for jumps in η and ±55…”

Section: B Jumpsmentioning

confidence: 99%

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Schneider¹,

Sögner²,

Veža³

2010

J. Financ. Quant. Anal.

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A previous version of this paper was circulated as "Jumps and Recovery Rates Inferred from Corporate CDS Premia". We are thankful to FIRM@WU for access to their high-performance computing resources as well as friendly support, and to Dow Jones for providing us with complete ICB sector information. AbstractUsing an extensive cross-section of US corporate CDS this paper offers an economic understanding of implied loss given default (LGD) and jumps in default risk. We formulate and underpin empirical stylized facts about CDS spreads, which are then reproduced in our affine intensity-based jump-diffusion model. Implied LGD is well identified, with obligors possessing substantial tangible assets expected to recover more. Sudden increases in the default risk of investment-grade obligors are higher relative to speculative grade. The probability of structural migration to default is low for investment-grade and heavily regulated obligors because investors fear distress rather through rare but devastating events.

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Section: B Jumpsmentioning

confidence: 99%

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Schneider¹,

Sögner²,

Veža³

2010

J. Financ. Quant. Anal.

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“…The probability function is then obtained via inverse Fourier transformation. Recently, using this approach, Bakshi, Cao and Chen (1997) develop and test a comprehensive closed-form option pricing formula including jump components of the stock price process, stochastic interest rates, and a square-root based stochastic volatility. Stochastic volatility option pricing models with closed-form solutions include also Bates (1994), and Scott (1997).…”

Section: Introductionmentioning

confidence: 99%

Stochastic Volatility With an Ornstein-Uhlenbeck Process: An Extension

1998

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may

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“…and then partially integrating (6.3) yields 4) which is the desired transformation with a function of integration c 1 (t). Additional differentiations of (6.3) produce…”

Section: Transformation To Perfect-square Formmentioning

confidence: 99%

Optimal Portfolio Problem for Stochastic-Volatility, Jump-Diffusion Models with Jump-Bankruptcy Condition: Practical Theory

Hanson

2008

SSRN Journal

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This paper treats the risk-averse optimal portfolio problem with consumption in continuous time with a stochastic-volatility, jump-diffusion (SVJD) model of the underlying risky asset and the volatility. The new developments are the use of the SVJD model with double-uniform jumpamplitude distributions and time-varying market parameters for the optimal portfolio problem. Although unlimited borrowing and short-selling play an important role in pure diffusion models, it is shown that borrowing and short selling are constrained for jump-diffusions. Finite range jump-amplitude models can allow constraints to be very large in contrast to infinite range models which severely restrict the optimal instantaneous stock-fraction to [0,1]. The reasonable constraints in the optimal stock-fraction due to jumps in the wealth argument for stochastic dynamic programming jump integrals remove a singularity in the stock-fraction due to vanishing volatility. Main modifications for the usual constant relative risk aversion (CRRA) power utility model are for handling the partial integro-differential equation (PIDE) resulting from the additional variance independent variable, instead of the ordinary integro-differential equation (OIDE) found for the pure jump-diffusion model of the wealth process. In addition to natural constraints due to jumps when enforcing the positivity of wealth condition, other constraints are considered for all practical purposes under finite market conditions. Also, a computationally practical solution of Heston's (1993) square-root-diffusion model for the underlying asset variance is derived. This shows that the nonnegativity of the variance is preserved through the proper singular limit of a simple perfect-square form. An exact, nonsingular solution is found for a special combination of the Heston stochastic volatility parameters.

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Empirical Performance of Alternative Option Pricing Models

Cited by 1,764 publications

References 47 publications

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Stochastic Volatility With an Ornstein-Uhlenbeck Process: An Extension

Optimal Portfolio Problem for Stochastic-Volatility, Jump-Diffusion Models with Jump-Bankruptcy Condition: Practical Theory

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