Equity Index Variance: Evidence from Flexible Parametric Jump-Diffusion Models

Andreas Kaeck, Paulo Rodrigues, Norman Johannes Seeger

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This paper analyzes a wide range of flexible drift and diffusion specifications of stochastic-volatility jump–diffusion models for daily S&P 500 index returns. We find that model performance is driven almost exclusively by the specification of the diffusion component whereas the drift specifications is of second-order importance. Further, the variance dynamics of non-affine models resemble popular non-parametric high-frequency estimates of variance, and their outperformance is mainly accumulated during turbulent market regimes. Finally, we show that jump diffusion models yield more reliable estimates for the expected return of variance swap contracts.

Original languageEnglish
Pages (from-to)85-103
Number of pages19
JournalJournal of Banking and Finance
Early online date20 Jun 2017
Publication statusPublished - Oct 2017

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