Extracting Latent States from High Frequency Option Prices

Extracting Latent States from High Frequency Option Prices

Oxford-Man Institute Quantitative Finance Seminar Series,

Thursday, May 9, 2019 – 16:00 to 17:00

Oxford-Man institute welcomes Geneviève Gauthier – HEC Montréal to give a talk as part of the OMI Quantitative Finance seminar series.

Abstract

We propose the realized option variance as a new observable variable to integrate high frequency option prices in the inference of option pricing models. Using simulation and empirical studies, this paper documents the incremental information offered by this realized measure. Our empirical results show that the information contained in the realized option variance improves the inference of model variables such as the instantaneous variance and variance jumps of the S&P 500 index. Parameter estimates indicate that the risk premium breakdown between jump and diffusive risks is affected by the omission of this information.

Bio

Geneviève Gauthier is a professor in the Department of Decision Sciences at HEC Montréal. With a background in statistics and stochastic calculus, she teaches financial engineering to master and doctoral students. Her research interests include modelling, measurement and management of risks, derivatives pricing, and financial econometrics. She received in 2018 the SSC Award For Impact of Applied and Collaborative Work from the Statistical Society of Canada for her outstanding contributions to the promotion of innovative statistical methodologies in financial engineering, and in the training of highly qualified personnel. Some of her publications appeared in Review of Financial Studies, Energy Journal, Journal of Risk and insurance, Journal of banking and Finance, and European Journal of Operations Research.