Department of Information and Systems Management School of Business and Management Hong Kong University of Science and Technology Seminar Announcement A Joiint Anallysiis of Return Dynamiics wiith Levy Jumps A Jo nt Ana ys s of Return Dynam cs w th Levy Jumps Usiing Stock and Optiion Priices Us ng Stock and Opt on Pr ces by Ms Cindy L. Yu Cornell University 26 January 2005 (Wed) 11:00am – 12:00pm Conference Room 4379 (lift 17-18) All interested are welcome Abstract We provide a joint analysis of return dynamics with Levy jumps under physical and risk neutral measures using stock and option prices. While the risk-neutral dynamics are important for option pricing, the physical dynamics are important for risk management, portfolio choices, and asset pricing. Our joint analysis provides more accurate estimates of volatility variables, and model parameters under both measures, as well as estimates of market prices of risks that govern the change of measure process. We discuss the change of measure and option pricing for infinite-activity Levy jumps. We also develop efficient MCMC methods for estimating model parameters and latent state variables using both stock and option prices. Using daily spot and option prices of the S&P 500 index, we show that models with infinite-activity Levy jumps in returns significantly outperform existing affine jump-diffusion models in capturing the joint dynamics of stock and option prices. Biography Ms Cindy L. Yu is currently a Ph.D. candidate in the Department of Statistics at Cornell University. She worked as a teaching assistant in the Department of Biometry and Department of Social Statistics at Cornell. Before attending Cornell, she studied in the School of Statistics at University of Minnesota and earned her M.S. degree in Statistics in 2000. During this period, not only she worked as a teaching assistant for some courses, ranging from elementary to Ph.D. core course in Statistics, but also as a statistical consultant in the consulting service center at the University of Minnesota, assisting clients from different fields with their statistical projects. Before she began her graduate study, she taught as an lecture in two places. During her visit to the Department of Mathematics at the University of South Dakota, she taught an algebra course to undergraduate students, fully responsible for developing and delivering lectures as well as creating assignments and exams. She had her another instructor experience in Yibin Teachers College of China right after she received her B.S. in Mathematics in 1995 from Sichuan University of China. She also had an internship experience with Merrill Lynch at New York in summer of 2001, where she worked as a research analyst in the quantitative research group of the fixed income department. Her current research interest focuses on Bayesian analysis of stochastic processes, especially Levy processes, for financial data. Her long run research focus will be on Bayesian and computational statistics with an applied orientation to the social sciences, such as economics and finance.