Jump risk and option liquidity in an incomplete market

Pei Lin Hsieh, Qin Qin Zhang, Yajun Wang

研究成果: 雜誌貢獻期刊論文同行評審

摘要

This study investigates the effect of a jump risk on options’ bid–ask implied volatility (IMV) spreads. We introduce theoretical models assuming market makers encounter a Bernoulli-type jump atnd optimize the mean-variance utility by choosing the optimal hedging delta and price. We find, at a low jump arrival rate, the Black–Scholes–Merton dynamic hedging for diffusion volatility outperforms static hedging for both diffusion and jump risks. If dynamic hedging is implemented, the jump components nonlinearly affect bid–ask spreads. Our regression supports our theoretical conclusions, and for model-free IMV, jump risk factors are characterized by t statistics above 7 with adjusted R2 above 70%.

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頁(從 - 到)1334-1369
頁數36
期刊Journal of Futures Markets
38
發行號11
DOIs
出版狀態已出版 - 11月 2018

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