NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in thePHLX Deutschemark Options

David S. Bates

NBER Working Paper No. 4596
Issued in December 1993
NBER Program(s):   AP

An efficient method is developed for pricing American options on combination stochastic volatility/jump-diffusion processes when jump risk and volatility risk are systematic and nondiversifiable, thereby nesting two major option pricing models. The parameters implicit in PHLX-traded Deutschemark options of the stochastic volatility/jump- diffusion model and various submodels are estimated over 1984-91, and are tested for consistency with the $/DM futures process and the implicit volatility sample path. The parameters implicit in options are found to be inconsistent with the time series properties of implicit volatilities, but qualitatively consistent with log- differenced futures prices. No economically significant implicit expectations of exchange rate jumps were found in full-sample estimation, which is consistent with the reduced leptokurtosis of $/DM weekly exchange rate changes over 1984-91 relative to earlier periods.

download in pdf format
   (486 K)

email paper

This paper is available as PDF (486 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4596

Published: Review of Financial Studies, Vol. 9, no. 1 (1996): 69-107.

Users who downloaded this paper also downloaded these:
Bates w5129 Testing Option Pricing Models
Bates w5894 Post-'87 Crash Fears in S&P 500 Futures Options
Andersen, Benzoni, and Lund w8510 An Empirical Investigation of Continuous-Time Equity Return Models
Duffie, Pan, and Singleton w7105 Transform Analysis and Asset Pricing for Affine Jump-Diffusions
Santa-Clara and Yan w10912 Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us