Department of Economics and Business Economics

Time-varying jump tails

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  • Tim Bollerslev
  • Viktor Todorov, Department of Finance, Kellogg School of Management, Northwestern University, United States

We develop new methods for the estimation of time-varying risk-neutral jump tails in asset returns. In contrast to existing procedures based on tightly parameterized models, our approach imposes much fewer structural assumptions, relying on extreme-value theory approximations together with short-maturity options. The new estimation approach explicitly allows the parameters characterizing the shape of the right and the left tails to differ, and importantly for the tail shape parameters to change over time. On implementing the procedures with a panel of S&P 500 options, our estimates clearly suggest the existence of highly statistically significant temporal variation in both of the tails. We further relate this temporal variation in the shape and the magnitude of the jump tails to the underlying return variation through the formulation of simple time series models for the tail parameters.

Original languageEnglish
JournalJournal of Econometrics
Volume183
Issue2
Pages (from-to)168-180
Number of pages13
ISSN0304-4076
DOIs
Publication statusPublished - 1 Jan 2014

    Research areas

  • Extreme value theory, Jumps, Market risk, Options, Risk-neutral distributions, Time-varying jump tails

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