Year: 2025
Type: article
Abstract: ABSTRACT The research question we consider is whether incremental complexity in option pricing models is justified by incremental model performance. We apply the model confidence set as a formal model comparison approach in appraising stochastic volatility jump‐diffusion option pricing models, spanning affine and nonaffine specifications. Jumps in price with stochastic (constant) arrival intensity produce superior (inferior) outcomes. A parsimonious negative exponential price jump distribution outperforms the popular normal distribution. Jumps in volatility (synchronized or not) worsen model performance. A parsimonious nonlinear hyperbolic drift extension of the Heston model performs particularly well. Nonlinear CEV models generally do not produce appreciable model performance.
Source: Journal of Futures Markets
DOI: 10.1002/fut.22575
Authors: Mark Cummins, Francesco Esposito
Institutions: University of Strathclyde, Dublin City University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,240
OpenAlex ID: W4408320023