Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7358912 | Journal of Economic Dynamics and Control | 2018 | 57 Pages |
Abstract
We propose a long-run risk model with stochastic volatility, a time-varying mean reversion level of volatility, and jumps in the state variables. The special feature of our model is that the jump intensity is not affine in the conditional variance but driven by a separate process. We show that this separation of jump risk from volatility risk is needed to match the empirically weak link between the level and the slope of the implied volatility smile for S&P 500 options.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Nicole Branger, Paulo Rodrigues, Christian Schlag,