thesis
Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in thePHLX Deutschemark Options
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Abstract
An efficient method is developed for pricing American options on combination stochastic volatility/jump-diffusion processes when jump risk and volatility risk are systematic and nondiversifiable, thereby nesting two major option pricing models. The parameters implicit in PHLX-traded Deutschemark options of the stochastic volatility/jump- diffusion model and various submodels are estimated over 1984-91, and are tested for consistency with the /DMfuturesprocessandtheimplicitvolatilitysamplepath.Theparametersimplicitinoptionsarefoundtobeinconsistentwiththetimeseriespropertiesofimplicitvolatilities,butqualitativelyconsistentwithlog−differencedfuturesprices.Noeconomicallysignificantimplicitexpectationsofexchangeratejumpswerefoundinfull−sampleestimation,whichisconsistentwiththereducedleptokurtosisof/DM weekly exchange rate changes over 1984-91 relative to earlier periods.