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Laurent E. Calvet
What's Beneath the Surface? Option Pricing with Multifrequency Latent States
(), Marcus Fearnley
(), Fisher Adlai J.
() and Leippold Markus
Abstract: We introduce a tractable class of non-affine price
processes with multifrequency stochastic volatility and jumps. The specifi
cations require few fixed parameters and deliver fast option pricing. One
key ingredient is a tight link between jumps and volatility regimes, as
asset pricing theory suggests. Empirically, the model matches implied
volatility surfaces and their dynamics without requiring parameter
recalibration. A variety of metrics show improvements over traditional
benchmarks in- and out-of-sample.
Keywords: Markov-switching multifractal; particle filter; regime-switching; stochastic volatility; jump-risk premium; option pricing.; (follow links to similar papers)
JEL-Codes: C51; G12; G13; (follow links to similar papers)
52 pages, January 18, 2013
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