Giacomo Bormetti (University of Bologna) on "A Jump-and-Smile Ride: Continuous and Jump Variance Risk Premia in Option Pricing"

During the talk I discuss a very general and fully analytical option pricing framework, encompassing a wide class of discrete time models featuring multiple component structure in both volatility and leverage, and a flexible pricing kernel with multiple risk premia. The proposed framework is general enough to include either GARCH-type volatility, Realized Volatility or a combination of the two. It also provides new way of separately estimate risk premia by coherently combining high-frequency returns and option data in multi-factor pricing models. I present an overview of various results attained within the novel framework. Specifically, I consider improvements in pricing out-of-the-money options, ability to generate a realistic hump-shaped term structure of variance swap rates, and evidence of strong predictability on future stock index returns.
Joint work with Dario Alitab, Fulvio Corsi, and Adam Majewski.