• Graduate program
  • Research
  • News
  • Events
    • Events Calendar
    • Events Archive
    • Summer School
      • Climate Change
      • Gender in Society
      • Inequalities in Health and Healthcare
      • Business Data Science Summer School Program
      • Receive updates
    • Tinbergen Institute Lectures
    • Annual Tinbergen Institute Conference
  • Summer School
    • Climate Change
    • Gender in Society
    • Inequalities in Health and Healthcare
    • Business Data Science Summer School Program
    • Receive updates
  • Alumni
  • Magazine
Home | Events Archive | Characteristic function-based factor modelling of affine jump diffusions
Research Master Pre-Defense

Characteristic function-based factor modelling of affine jump diffusions


  • Series
    Research Master Defense
  • Speaker(s)
    Niels Marijnen , Niels Marijnen
  • Location
    Tinbergen Institute Amsterdam, room 1.24
    Amsterdam
  • Date and time

    August 30, 2022
    12:00 - 13:00

We develop a framework to analyse affine jump diffusions using factor modelling techniques, offering a novel method to study which and how many risk factors drive the price process of a single asset. We use information contained in options to construct observations on the characteristic function of the underlying price process without having to specify a parametric model. We form a linear factor model out of these observations, and extract the factors using principal component analysis. We propose a criterion for the number of risk factors based on the eigenvalues of the sample covariance matrix of the constructed factor model. We analyse the finite-sample performance in a Monte Carlo study. An empirical application suggests that the main factors underlying S&P 500 index options are the index price and a process related to the volatility, which jointly explain well over 90% of the variation regardless of the choice of tuning parameters. Comparing the results when using options with a variety of maturities to the results when using only monthly options, we find evidence for an additional factor, necessary to explain the term-structure in option prices. This could be explained by a two-factor volatility model, but also by the presence of jumps.