Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/14852
Title: Diagnosing affine models of options pricing : evidence from VIX
Authors: Li, G 
Zhang, C
Keywords: Affine jump-diffusion models
Options pricing
Variance-swap prices
Issue Date: 2013
Publisher: Elsevier
Source: Journal of financial economics, 2013, v. 107, no. 1, p. 199-219 How to cite?
Journal: Journal of financial economics 
Abstract: Affine jump-diffusion models have been the mainstream in options pricing because of their analytical tractability. Popular affine jump-diffusion models, however, are still unsatisfactory in describing the options data and the problem is often attributed to the diffusion term of the unobserved state variables. Using prices of variance-swaps (i.e., squared VIX) implied from options prices, we provide fresh evidence regarding the misspecification of affine jump-diffusion models, as variance-swap prices are affine functions of the state variables in a broader class of models that do not restrict the diffusion term of the state variables. We apply the nonparametric methodology used by Aït-Sahalia (1996b), supplemented with bootstrap tests and other parametric tests, to the S&P 500 index options data from January 1996 to September 2008. We find that, while the affine diffusion term of the state variables may contribute to the misspecification as the literature has suggested, the affine drift of the state variables, jump intensities, and risk premiums are also sources of misspecification.
URI: http://hdl.handle.net/10397/14852
ISSN: 0304-405X
DOI: 10.1016/j.jfineco.2012.08.011
Appears in Collections:Journal/Magazine Article

Access
View full-text via PolyU eLinks SFX Query
Show full item record

SCOPUSTM   
Citations

4
Last Week
0
Last month
0
Citations as of Sep 22, 2017

WEB OF SCIENCETM
Citations

4
Last Week
0
Last month
0
Citations as of Sep 25, 2017

Page view(s)

29
Last Week
0
Last month
Checked on Sep 25, 2017

Google ScholarTM

Check

Altmetric



Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.