Son-Nan Chen

This study investigates the leverage effect and realized volatility (RV) of stocks in the presence of asymmetric jumps across economic expansions and contractions. We extend the heterogeneous autoregressive-realized volatility (HAR-RV) model by incorporating a two-period Markov regime-switching model to capture Taiwan’s economic expansion and contraction. Using Taiwan’s COVID-19 insurance-oversold events as a case–control setting, we compare the asymmetric jump risk effects on RV and realized semivariance (RSV). The results reveal that business cycle (BC) effects offset jump risk impacts, rendering intrinsic jump components statistically insignificant when BC information is omitted. During contraction periods, asymmetric jumps generate stronger negative RSV shocks, amplifying the leverage effect. Moreover, the predictive accuracy of RV critically depends on the prevailing business cycle state. By incorporating BC effects into the model, we recapture significant jump components and enhance volatility forecasting performance.

A reduced-form model is proposed to disentangle the dynamics of positive-jump, diffusion, and long-term risks in the VIX assets. A dissection of the three component risks in volatility is undertaken to determine their distinctive dynamics, risk prices, and market information. The dynamics of three component volatility risks play important and distinctive roles in the VIX derivatives market. The risk dissection substantially improves VIX option valuation. The component risks considerably explain VIX asset returns with a distinct exposure pattern and require separate risk premia. The risks are priced distinctively in the volatility market and are sensitive to different macroeconomic conditions. A comparison of the VIX derivatives market with the S&P 500 market reveals incremental information from the component risks beyond that provided by traditional S&P 500 and its option market. TOPICS: Derivatives, options, factors, risk premia Key Findings ▪ A reduced-form model is used to disentangle the jump risks dynamic from the diffusion and long-term risks in the volatility market. The dynamic volatility jump risk is shown to be critical in the VIX derivatives market. ▪ We find unique properties in the different volatility risks. The three component risks are separately priced in the VIX market, the risk premia compose the total variance premium by different patterns, and they have unique responding for the macroeconomic conditions. ▪ We compare the pricing information in the S&P 500 and volatility markets, and we show that component risk dynamics in the VIX derivatives market contains incremental and critical pricing information beyond what is embedded in the S&P 500 and its option market.

Carbon markets trade the spot European Union Allowance (EUA), with one EUA providing the right to emit one tone of carbon dioxide (CO₂). We examine the spot EUA returns in BlueNext that exhibit jumps and a volatility clustering feature. We propose a regime-switching jump diffusion model (RSJM) with a hidden Markov chain to capture not only a volatility clustering feature, but also the dynamics of the spot EUA returns that are influenced by change in the CO₂ emission economic conditions. In addition, the switching jump intensities of the RSJM are shown to be affected by change in the carbon-market macroeconomic environment. We further derive the theoretical futures-option prices with a constant convenience yield under the RSJM via the generalized Esscher transform where regime-switching risk is priced with a risk premium. The empirical study shows that the derived futures-option pricing model under the RSJM with regime-switching risk is a more complete model than a jump diffusion model for pricing CO₂ options.