Time-varying jump tails

Published

Journal Article

© 2014 Elsevier B.V. All rights reserved. We develop new methods for the estimation of time-varying risk-neutral jump tails in asset returns. In contrast to existing procedures based on tightly parameterized models, our approach imposes much fewer structural assumptions, relying on extreme-value theory approximations together with short-maturity options. The new estimation approach explicitly allows the parameters characterizing the shape of the right and the left tails to differ, and importantly for the tail shape parameters to change over time. On implementing the procedures with a panel of S&P 500 options, our estimates clearly suggest the existence of highly statistically significant temporal variation in both of the tails. We further relate this temporal variation in the shape and the magnitude of the jump tails to the underlying return variation through the formulation of simple time series models for the tail parameters.

Full Text

Duke Authors

Cited Authors

  • Bollerslev, T; Todorov, V

Published Date

  • January 1, 2014

Published In

Volume / Issue

  • 183 / 2

Start / End Page

  • 168 - 180

Electronic International Standard Serial Number (EISSN)

  • 1872-6895

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2014.05.007

Citation Source

  • Scopus