Level and slope of volatility smiles in long-run risk models

  • 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.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:Nicole BrangerORCiDGND, Paulo Rodrigues, Christian Schlag
URN:urn:nbn:de:hebis:30:3-450645
URL:https://ssrn.com/abstract=3064658
Parent Title (English):SAFE working paper series ; No. 186
Series (Serial Number):SAFE working paper series (186)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2017/11/14
Tag:Asset pricing; Epstein-Zin preferences; jump risk; level and slope of implied volatility smile; stochastic volatility
Edition:This version: October 16, 2017
Page Number:59
HeBIS-PPN:424225018
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht