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Equity index variance: evidence from flexible parametric jump–diffusion models

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posted on 2023-06-09, 06:50 authored by Andreas KaeckAndreas Kaeck, Paulo Rodrigues, Norman Seeger
This paper analyzes a wide range of flexible drift and diffusion specifications of stochastic-volatility jump-diffusion models for daily S&P 500 index returns. We find that model performance is driven almost exclusively by the specification of the diffusion component whereas the drift specifications is of second-order importance. Further, the variance dynamics of non-affine models resemble popular non-parametric high-frequency estimates of variance, and their outperformance is mainly accumulated during turbulent market regimes. Finally, we show that jump diffusion models yield more reliable estimates for the expected return of variance swap contracts.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

Journal of Banking and Finance

ISSN

0378-4266

Publisher

Elsevier

Volume

83

Page range

85-103

Department affiliated with

  • Business and Management Publications

Research groups affiliated with

  • Quantitative International Finance Network Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2017-06-22

First Open Access (FOA) Date

2018-12-21

First Compliant Deposit (FCD) Date

2017-06-22

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