Empirical Option Pricing: Evidence on Stochastic Volatility and Jump Risk

Summary

This overview surveys empirical research on pricing stock-index options, focusing on how systematic stochastic volatility and jump risk affect option values and returns. It describes the evolution from Black–Scholes–Merton assumptions, in which the underlying follows geometric Brownian motion with Gaussian returns, toward models that also account for stochastic volatility, interest rates, and jumps. The discussion draws on evidence from asset-return time series, option prices, and changes in option prices over time.

The review also covers compensation for bearing these risks, average option returns, and the implied pricing-kernel puzzle. It links continuous-time stochastic-volatility models with discrete-time ARCH approaches and notes connections between multifactor volatility models and component GARCH. The supplied text is an abstract-level summary of a broader paper: it names the topics and evidence sources but gives no specific estimates, model comparisons, or conclusions about which risks dominate. Its scope is stock-index options, so the summary does not establish that the findings transfer unchanged to other underlyings or markets.

Key ideas

• Empirical option pricing research studies how stochastic volatility and jump risk influence stock-index option values and returns.
• The field extended Gaussian geometric Brownian motion models to include volatility, interest-rate, and jump risks.
• Researchers examine evidence from return time series, option prices, and the evolution of option prices.
• The review addresses risk compensation, average option returns, and the implied pricing-kernel puzzle.
• The supplied overview does not report detailed estimates or comparative model results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.