INFERENCE for OPTION PANELS in PURE-JUMP SETTINGS

Torben G. Andersen, Nicola Fusari, Viktor Todorov*, Rasmus T. Varneskov

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We develop parametric inference procedures for large panels of noisy option data in a setting, where the underlying process is of pure-jump type, i.e., evolves only through a sequence of jumps. The panel consists of options written on the underlying asset with a (different) set of strikes and maturities available across the observation times. We consider an asymptotic setting in which the cross-sectional dimension of the panel increases to infinity, while the time span remains fixed. The information set is augmented with high-frequency data on the underlying asset. Given a parametric specification for the risk-neutral asset return dynamics, the option prices are nonlinear functions of a time-invariant parameter vector and a time-varying latent state vector (or factors). Furthermore, no-arbitrage restrictions impose a direct link between some of the quantities that may be identified from the return and option data. These include the so-called jump activity index as well as the time-varying jump intensity. We propose penalized least squares estimation in which we minimize the L2 distance between observed and model-implied options. In addition, we penalize for the deviation of the model-implied quantities from their model-free counterparts, obtained from the high-frequency returns. We derive the joint asymptotic distribution of the parameters, factor realizations and high-frequency measures, which is mixed Gaussian. The different components of the parameter and state vector exhibit different rates of convergence, depending on the relative (asymptotic) informativeness of the high-frequency return data and the option panel.

Original languageEnglish (US)
Pages (from-to)901-942
Number of pages42
JournalEconometric Theory
Volume35
Issue number5
DOIs
StatePublished - Oct 1 2019

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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