Diagnosing affine models of options pricing: Evidence from VIXGang Li and Chu Zhang Journal of Financial Economics, 2013, vol. 107, issue 1, 199-219 Abstract: Affine jump-diffusion models have been the mainstream in options pricing because of their analytical tractability. Popular affine jump-diffusion models, however, are still unsatisfactory in describing the options data and the problem is often attributed to the diffusion term of the unobserved state variables. Using prices of variance-swaps (i.e., squared VIX) implied from options prices, we provide fresh evidence regarding the misspecification of affine jump-diffusion models, as variance-swap prices are affine functions of the state variables in a broader class of models that do not restrict the diffusion term of the state variables. We apply the nonparametric methodology used by Aït-Sahalia (1996b), supplemented with bootstrap tests and other parametric tests, to the S&P 500 index options data from January 1996 to September 2008. We find that, while the affine diffusion term of the state variables may contribute to the misspecification as the literature has suggested, the affine drift of the state variables, jump intensities, and risk premiums are also sources of misspecification. Keywords: Options pricing; Affine jump-diffusion models; Variance-swap prices (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:1:p:199-219 DOI: 10.1016/j.jfineco.2012.08.011 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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