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dc.contributor.authorBranger, Nicoleen_US
dc.contributor.authorSchlag, Christianen_US
dc.description.abstractWhen options are traded, one can use their prices and price changes to drawinference about the set of risk factors and their risk premia. We analyze testsfor the existence and the sign of the market prices of jump risk that are basedon 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 modelspecification. 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 marketprice of jump risk). Thus, the expected hedging error cannot identify the exactstructure of the compensation for jump risk.Furthermore, we derive closed form solutions for the expected option hedgingerror under discrete trading and model mis-specification. Compared to theideal case, the sign of the expected hedging error can change, so that empiricaltests based on simplifying assumptions about trading frequency and the modelmay lead to incorrect conclusions.en_US
dc.relation.ispartofseries|aWorking paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting |x140en_US
dc.subject.keywordStochastic jumpsen_US
dc.subject.keywordmarket prices of risken_US
dc.subject.keyworddiscrete tradingen_US
dc.subject.keywordmodel mis-specificationen_US
dc.subject.keywordhedging erroren_US
dc.subject.stwStochastischer Prozessen_US
dc.titleIs Jump Risk Priced? What We Can (and Cannot) Learn From Option Hedging Errorsen_US
dc.typeWorking Paperen_US

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