Deterministic volatility models and dynamics of option returns

Abstract

In this research, we revamp the approach of Buraschi and Jackwerth (2001), especially, in the derivation of the pricing-kernel and the data-handling technique and then empirically analyze the consistency of the DVMs introduced in Mawaribuchi, Miyazaki and Okamoto (2009) to the dynamics of the cross-sectional option returns. The implication attained from our quantitative analyses is that even in the trending and volatile market, we could build the equity models that are rational to the dynamics of the cross-sectional option market prices within the framework of the complete model without incorporating the additional stochastic variable such as jump or stochastic volatility.