Lazaridis School Professor Diego Amaya awarded NFA's Best Paper in Derivatives

Diego Amaya, assistant professor of Finance at Wilfrid Laurier University’s Lazaridis School of Business and Economics, and co-authors Jean-François Bégin (Simon Fraser University) and Geneviève Gauthier (HEC Montreal) were awarded Northern Finance Association Best Paper in Derivatives for the study "Extracting Latent States from High Frequency Option Prices." 

The authors propose new observable variables to estimate financial models with time-varying volatility and jumps. Prices in equity markets are subject to different risk factors with complex interactions and dynamics. Time-varying volatility and sudden price changes – commonly referred as jumps – are recognized to be two risk sources driving the evolution of equity prices. Nonetheless, in many financial models these two components are not observable, meaning that their dynamics and interactions are subsumed in observed prices. As a result, the identification and estimation of these risk sources pose significant challenges.

The study documents how high frequency option prices provide new information that improves the estimation of these two sources of risk. The study further shows that the omission of this information impacts estimates of the premium that investors require for bearing these risks.