The Impact of Overnight Periods on Option Pricing

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Abstract

This paper investigates the effect of closed overnight exchanges on option prices.During the trading day asset prices follow the literature s standard affine model which allows asset prices to exhibit stochastic volatility and random jumps.Independently, the overnight asset price process is modelled by a single jump.We find that the overnight component reduces the variation in the random jump process significantly.However, neither the random jumps nor the overnight jumps alone are able to empirically describe all features of asset prices.We conclude that both random jumps during the day and overnight jumps are important in explaining option prices, where the latter account for about one quarter of total jump risk.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages19
Volume2005-1
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-1

Keywords

  • Derivative pricing
  • Jump diffusion
  • Stochastic volatility

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  • Cite this

    Boes, M. J., Drost, F. C., & Werker, B. J. M. (2005). The Impact of Overnight Periods on Option Pricing. (CentER Discussion Paper; Vol. 2005-1). Finance.