Department of Economics and Business Economics

Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

Research output: Working paperResearch

Standard

Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. / Babaglou, Kadir G.; Christoffersen, Peter; Heston, Stefen L.; Jacobs, Kris.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2015.

Research output: Working paperResearch

Harvard

Babaglou, KG, Christoffersen, P, Heston, SL & Jacobs, K 2015 'Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Babaglou, K. G., Christoffersen, P., Heston, S. L., & Jacobs, K. (2015). Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2015-55

CBE

Babaglou KG, Christoffersen P, Heston SL, Jacobs K. 2015. Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Babaglou, Kadir G. et al. Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2015-55). 2015., 50 p.

Vancouver

Babaglou KG, Christoffersen P, Heston SL, Jacobs K. Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Aarhus: Institut for Økonomi, Aarhus Universitet. 2015 Nov 30.

Author

Babaglou, Kadir G. ; Christoffersen, Peter ; Heston, Stefen L. ; Jacobs, Kris. / Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels. Aarhus : Institut for Økonomi, Aarhus Universitet, 2015. (CREATES Research Papers; No. 2015-55).

Bibtex

@techreport{521b3f45d3d44d64ab98dbcb80c8c421,
title = "Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels",
abstract = "We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.",
keywords = "volatility components, fat tails, jumps, pricing kernel",
author = "Babaglou, {Kadir G.} and Peter Christoffersen and Heston, {Stefen L.} and Kris Jacobs",
year = "2015",
month = nov,
day = "30",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2015-55",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

AU - Babaglou, Kadir G.

AU - Christoffersen, Peter

AU - Heston, Stefen L.

AU - Jacobs, Kris

PY - 2015/11/30

Y1 - 2015/11/30

N2 - We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.

AB - We nest multiple volatility components, fat tails and a U-shaped pricing kernel in a single option model and compare their contribution to describing returns and option data. All three features lead to statistically significant model improvements. A second volatility factor is economically most important and improves option fit by 18% on average. A U-shaped pricing kernel improves the option fit by 17% on average, and more so for two-factor models. Fat tails improve option fit by just over 3% on average, and more so when a U-shaped pricing kernel is applied. Our results suggest that the three features we investigate are complements rather than substitutes.

KW - volatility components, fat tails, jumps, pricing kernel

M3 - Working paper

T3 - CREATES Research Papers

BT - Option Valuation with Volatility Components, Fat Tails, and Nonlinear Pricing Kernels

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -