Abstract Details
Activity Number:
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347
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Type:
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Topic Contributed
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Date/Time:
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Tuesday, August 6, 2013 : 10:30 AM to 12:20 PM
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Sponsor:
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Business and Economic Statistics Section
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Abstract - #309833 |
Title:
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What's Beneath the Surface? Option Pricing with Multifrequency Latent States
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Author(s):
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Laurent Calvet*+ and Marcus Fearnley and Adlai Fisher and Markus Leippold
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Companies:
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HEC Paris and HEC Paris and University of British Columbia and University of Zurich
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Keywords:
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Markov-switching multifractal ;
particle filter ;
regime-switching ;
stochastic volatility ;
jump-risk premium ;
option pricing
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Abstract:
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We introduce a tractable class of non-affine price processes with multifrequency stochastic volatility and jumps. The specifications require few fixed parameters and deliver fast option pricing. One key ingredient is a tight link between jumps and volatility regimes, as asset pricing theory suggests. Empirically, the model matches implied volatility surfaces and their dynamics without requiring parameter recalibration. A variety of metrics show improvements over traditional benchmarks in- and out-of-sample.
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