On the relationship between conditional jump intensity and diffusive volatility

Gang Li, Chu Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

2 Citations (Scopus)

Abstract

In standard options pricing models that include jump components to capture large price changes, the conditional jump intensity is typically specified as an increasing function of the diffusive volatility. We conduct model-free estimation and tests of the relationship between jump intensity and diffusive volatility. Simulation analysis confirms that the tests have power to reject the null hypothesis of no relationship if data are generated with the relationship. Applying the method to a few stock indexes and individual stocks, however, we find little evidence that jump intensity positively depends on diffusive volatility as a general property of the jump intensity. The findings of the paper give impetus to improving the specification of jump dynamics in options pricing models.
Original languageEnglish
Pages (from-to)196-213
Number of pages18
JournalJournal of Empirical Finance
Volume37
DOIs
Publication statusPublished - 1 Jun 2016

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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