Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197837 
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2017-52
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Advances in variance analysis permit the splitting of the total quadratic variation of a jump diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of the asymmetry in stock price distributions. To appraise the economic gain of this decomposition, we design a new and flexible option pricing model in which the underlying asset price exhibits distinct upside and downside semi-variance dynamics driven by their model-free proxies. The new model outperforms common benchmarks, especially the alternative that splits the quadratic variation into diffusive and jump components.
Subjects: 
Asset pricing
Econometric and statistical methods
JEL: 
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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