Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options

Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options An efficient method is developed for pricing American options on stochastic volatility/jump-diffusion processes under systematic jump and volatility risk. The parameters implicit in deutsche mark (DM) options of the model and various submodels are estimated over the period 1984 to 1991 via nonlinear generalized least squares, and are tested for consistency with $/DM futures prices and the implicit volatility sample path. The stochastic volatility submodel cannot explain the “volatility smile” evidence of implicit excess kurtosis, except under parameters implausible given the time series properties of implicit volatilities. Jump fears can explain the smile, and are consistent with one 8 percent DM appreciation “outlier” observed over the period 1984 to 1991. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options

The Review of Financial Studies, Volume 9 (1) – Jan 3, 1996

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Publisher
Oxford University Press
Copyright
Oxford University Press
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/9.1.69
Publisher site
See Article on Publisher Site

Abstract

An efficient method is developed for pricing American options on stochastic volatility/jump-diffusion processes under systematic jump and volatility risk. The parameters implicit in deutsche mark (DM) options of the model and various submodels are estimated over the period 1984 to 1991 via nonlinear generalized least squares, and are tested for consistency with $/DM futures prices and the implicit volatility sample path. The stochastic volatility submodel cannot explain the “volatility smile” evidence of implicit excess kurtosis, except under parameters implausible given the time series properties of implicit volatilities. Jump fears can explain the smile, and are consistent with one 8 percent DM appreciation “outlier” observed over the period 1984 to 1991.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 3, 1996

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