EconStor >
Goethe-Universität Frankfurt am Main >
Fachbereich Wirtschaftswissenschaften, Universität Frankfurt a. M. >
Working Paper Series: Finance and Accounting, Universität Frankfurt a. M. >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/23405
  
Title:Is Jump Risk Priced? What We Can (and Cannot) Learn From Option Hedging Errors PDF Logo
Authors:Branger, Nicole
Schlag, Christian
Issue Date:2004
Series/Report no.:Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting 140
Abstract:When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution for the option hedging error and its expecta- tion in a stochastic jump model under continuous trading and correct model specification. Jump risk is structurally different from, e.g., stochastic volatility: there is one market price of risk for each jump size (and not just the market price of jump risk). Thus, the expected hedging error cannot identify the exact structure of the compensation for jump risk. Furthermore, we derive closed form solutions for the expected option hedging error under discrete trading and model mis-specification. Compared to the ideal case, the sign of the expected hedging error can change, so that empirical tests based on simplifying assumptions about trading frequency and the model may lead to incorrect conclusions.
Subjects:Stochastic jumps
market prices of risk
discrete trading
model mis-specification
hedging error
JEL:G13
G12
Document Type:Working Paper
Appears in Collections:Working Paper Series: Finance and Accounting, Universität Frankfurt a. M.

Files in This Item:
File Description SizeFormat
686.pdf420.59 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/23405

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.