By using an over-identified Generalized Method of Moments (GMM) estimation procedure with careful consideration for data biases existing in the previous literature, parameters are estimated for a stochastic volatility jump diffusion option pricing (SVJ) model. The estimated parameters indicate a statistically significant highly negative infrequent jump process in the underlying security return distribution consistent with market crashes. When comparing to a stochastic volatility (SV) option pricing model, the SVJ is more robust but not always the superior model. The robustness of the models is further gauged by evaluating performance up to a year beyond the estimation data.

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Copyright © 2005 Elsevier B. V. Article first published online: 1 JULY 2005. DOI: 10.1016/j.ribaf.2004.09.001.

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Arnold, Tom. "Using GMM to Flatten the Option Volatility Smile." Research in International Business and Finance 20, no. 1 (March 2006): 1-21. doi:10.1016/j.ribaf.2004.09.001.