Jump Contagion among Stock Market Indices: Evidence from Option Markets

Boswijk, H. Peter; Laeven, Roger J. A.; Lalu, Andrei; Vladimirov, Evgenii

doi:10.2139/ssrn.3929515

Cited by 1 publication

(2 citation statements)

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“…For instance, Carrasco and Florens (2000) develop a generalized method of moments (GMM) estimator with a continuum of moment conditions based on the CCF; see also Singleton (2001), Carrasco, Chernov, Florens, and Ghysels (2007). In applications to option prices, Boswijk, Laeven, and Lalu (2015) and Boswijk, Laeven, Lalu, and Vladimirov (2021) propose to imply the latent state vector from a panel of options and then estimate the model via GMM with a continuum of moments. Bates (2006) develops maximum likelihood estimation and filtering using CCFs.…”

Section: Introductionmentioning

confidence: 99%

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Estimating Option Pricing Models Using a Characteristic Function-Based Linear State Space Representation

Boswijk¹,

Laeven²,

Vladimirov³

2022

Preprint

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We develop a novel filtering and estimation procedure for parametric option pricing models driven by general affine jump-diffusions. Our procedure is based on the comparison between an option-implied, model-free representation of the conditional log-characteristic function and the model-implied conditional log-characteristic function, which is functionally affine in the model's state vector. We formally derive an associated linear state space representation and establish the asymptotic properties of the corresponding measurement errors. The state space representation allows us to use a suitably modified Kalman filtering technique to learn about the latent state vector and a quasi-maximum likelihood estimator of the model parameters, which brings important computational advantages. We analyze the finite-sample behavior of our procedure in Monte Carlo simulations. The applicability of our procedure is illustrated in two case studies that analyze S&P 500 option prices and the impact of exogenous state variables capturing Covid-19 reproduction and economic policy uncertainty.

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Section: Introductionmentioning

confidence: 99%

“… Similarly, Andersen et al (2017) andBoswijk et al (2021) consider an approximation of the return process with 'freezed' spot volatility when estimating their option pricing models with short-dated options.…”

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confidence: 99%