Michael Johannes

The Impact of Jumps in Equity Index Volatility and Returns

Coauthor(s): Bjørn Eraker, Nicholas Polson.

This paper examines continuous-time stochastic volatility models incorporating jumps in returns and volatility. We develop a likelihood-based estimation strategy and provide estimates of parameters, spot volatility, jump times, and jump sizes using S&P 500 and Nasdaq 100 index returns. Estimates of jump times, jump sizes, and volatility are particularly useful for identifying the effects of these factors during periods of market stress, such as those in 1987, 1997, and 1998. Using formal and informal diagnostics, we find strong evidence for jumps in volatility and jumps in returns. Finally, we study how these factors and estimation risk impact option pricing.

Source: Journal of Finance
Exact Citation:
Eraker, Bjørn, Michael Johannes, and Nicholas Polson. "The Impact of Jumps in Equity Index Volatility and Returns." Journal of Finance 58, no. 3 (June 2003): 1269-1300.
Volume: 58
Number: 3
Pages: 1269-1300
Date: 6 2003