@techreport{Branger2004Jump,
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.},
address = {Frankfurt a. M.},
author = {Nicole Branger and Christian Schlag},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {G13; G12; 330; Stochastic jumps; market prices of risk; discrete trading; model mis-specification; hedging error; Optionspreistheorie; Hedging; Stochastischer Prozess; Theorie},
language = {eng},
number = {140},
publisher = {Johann Wolfgang Goethe-Universit\"{a}t Frankfurt am Main, Fachbereich Wirtschaftswissenschaften},
title = {Is Jump Risk Priced? What We Can (and Cannot) Learn From Option Hedging Errors},
type = {Working Paper Series: Finance & Accounting},
url = {http://hdl.handle.net/10419/23405},
year = {2004}
}