driftVsDiffusionSV.pdf (3.24 MB)
Equity index variance: evidence from flexible parametric jump–diffusion models
journal contribution
posted on 2023-06-09, 06:50 authored by Andreas KaeckAndreas Kaeck, Paulo Rodrigues, Norman SeegerThis 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 FinanceISSN
0378-4266Publisher
ElsevierExternal DOI
Volume
83Page range
85-103Department affiliated with
- Business and Management Publications
Research groups affiliated with
- Quantitative International Finance Network Publications
Full text available
- Yes
Peer reviewed?
- Yes