The Financial Econometrics Seminar: 
Time: 12:15 – 13.30 pm
Date: 9th of June 2022
Room 3001+ zoom

Arnaud DUFAYS (EDHEC) “FACTOR DYNAMICS, RISK PREMIA, AND HIGHER MOMENTS IN MULTI-FACTOR OPTION PRICING MODELS”

Abstract :The cross-section of options holds great promise for identifying return distributions and risk premiums, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle MCMC framework with a novel filtering approach to solve this computational problem. Our method allows for estimating state-of-the-art models and beyond, using large option panels. This leads to more precise estimates of model parameters and risk premiums. We illustrate our approach by extending the Heston option pricing model to a model exhibiting up to three volatility factors and jumps in returns. In terms of option pricing, we show that a model with three volatility factors is necessary for fitting long-term maturities. Importantly, the risk premiums of the latter model are also flexible and more in line with non-parametric estimates than alternative models we consider.

Joint work with K. Jacobs and J. Rombouts

Organizers:

Jean-Michel ZAKOIAN  (CREST)

Sponsors:
CREST