Article ID Journal Published Year Pages File Type
5088042 Journal of Banking & Finance 2017 62 Pages PDF
Abstract
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.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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