Is jump risk priced? - What we can (and cannot) learn from option hedging errors : [This version: November 26, 2004]

When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk
When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution for the option hedging error and its expectation in a stochastic jump model under continuous trading and correct model specification. Jump risk is structurally different from, e.g., stochastic volatility: there is one market price of risk for each jump size (and not just \emph{the} market price of jump risk). Thus, the expected hedging error cannot identify the exact structure of the compensation for jump risk. Furthermore, we derive closed form solutions for the expected option hedging error under discrete trading and model mis-specification. Compared to the ideal case, the sign of the expected hedging error can change, so that empirical tests based on simplifying assumptions about trading frequency and the model may lead to incorrect conclusions.
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Metadaten
Author:Nicole Branger, Christian Schlag
URN:urn:nbn:de:hebis:30-17663
Parent Title (English):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 140
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (140)
Publisher:Univ., Fachbereich Wirtschaftswiss.
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2004
Year of first Publication:2004
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2005/10/06
Tag:Optionspreistheorie / Hedging / Stochastischer Prozess / Theorie
Stochastic jumps ; discrete trading ; hedging error; market prices of risk ; model mis-specification
Issue:November 26, 2004 §
Pagenumber:38
Source:Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting ; 140
HeBIS PPN:180411039
Institutes:Wirtschaftswissenschaften
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:G12 Asset Pricing; Trading volume; Bond Interest Rates
G13 Contingent Pricing; Futures Pricing
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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