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- Title
Option Valuation with Volatility Components, Fat Tails, and Nonmonotonic Pricing Kernels.
- Authors
Babaoğlu, Kadir; Christoffersen, Peter; Heston, Steven; Jacobs, Kris
- Abstract
We nest multiple volatility components, fat tails, and a U-shaped pricing kernel in a single option model and compare their contribution in describing returns and option data. All three features lead to statistically significant model improvements. A U-shaped pricing kernel is economically most important and improves option fit by 17%, on average, and more so for two-factor models. A second volatility component improves the option fit by 9%, on average. Fat tails improve option fit by just over 4%, on average, but more so when a U-shaped pricing kernel is applied. Overall, these three model features are complements rather than substitutes: the importance of one feature increases in conjunction with the others. Received date September 27, 2016; Accepted date July 09, 2017 By Editor Raman Uppal
- Publication
Review of Asset Pricing Studies, 2018, Vol 8, Issue 2, p183
- ISSN
2045-9920
- Publication type
Article
- DOI
10.1093/rapstu/rax021