Paper by Peter Boswijk, Roger Laeven, Andrei Lalu and Evgenii Vladimirov to appear in the Journal of the American Statistical Association

Abstract (extended version)

Intricate linkages exist between international financial markets. Shocks to financial markets tend to propagate rapidly from one market to the next, potentially amplifying the initial shock via dynamic feedback loops. Such contagious amplification over time and in space (across markets) has important implications for risk management and scenario analysis, valuation and hedging, and portfolio choice and international diversification.

Option markets provide a unique laboratory to analyze these contagion effects. We analyze the contagious propagation of jumps among international stock market indices, using a rich panel of high-frequency stock and options data (692,892 option contracts) over the period 2006–2015. We propose a bivariate option pricing model designed to allow for time and space amplification of jumps in option markets. We develop a semi-parametric estimation procedure, which employs a continuum of moment conditions in GMM with implied states and non-parametric high-frequency spot volatility estimation. A partial-information approach is introduced to reduce the computational complexity arising in the multivariate setting.

We find statistical evidence of jump contagion both within and between stock market indices. Our results reveal that jump contagion from the United States to the United Kingdom is more pronounced than vice versa, whereas the jump contagion effects between the United States and Germany stand on equal footing. We illustrate the statistical and economic importance of capturing jump contagion for risk management, option pricing, and scenario analysis. We show that accounting for jump contagion, employing scenarios based on the Global Financial Crisis, leads to an increase of capital requirements in the United Kingdom from 6.3% to 8.4% for each unit invested.

This paper is the first to analyze jump contagion among international stock market indices using the laboratory of option panel data.

Article citation

Boswijk, H. Peter, Roger J. A. Laeven, Andrei Lalu and Evgenii Vladimirov (2026). ‘Jump Contagion among Stock Market Indices: Evidence from Option Markets’, Journal of the American Statistical Association, forthcoming, doi.org/10.1080/01621459.2026.2635068.