Critical point on variance swap pricing is established …

This paper proposes a new approach to measure premiums for volatility and jump risks in option markets. These risks are … captured by a multi-factor jump-diffusion model for the joint evolution of the underlying and the implied volatility surface … variables such as the volatility and jump-intensity of the underlying. This allows us to dynamically calibrate these variables …

volatility. In the model, consistent with survey evidence, following positive (negative) stock returns, investors expect future … returns to be higher (lower) but also less (more) volatile. The biased volatility expectation introduces a new channel through …

treatment considers models with market incompleteness and sources of volatility uncertainty …

and the non-normality assumption on moment risk premia and the implied volatility curves …