Volatility Uncertainty and Jumps

37 Pages Posted: 10 May 2018 Last revised: 12 Dec 2019

See all articles by Thomas Grünthaler

Thomas Grünthaler

University of Muenster - Finance Center Muenster

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster

Date Written: October 28, 2019

Abstract

This paper analyzes the joint dynamics of S&P 500 jumps and volatility using option-implied information. Our results indicate that volatility is not related to the evolution of jumps but the uncertainty about volatility is. More uncertainty about future volatility shifts the return distribution to the left, such that negative price jumps are more likely and positive price jumps are less likely. We highlight the unique information content in volatility uncertainty and further show that it significantly predicts realized price jumps. Our results have strong implications for structural option pricing models as a linear link between the arrival of jumps and volatility is commonly assumed.

Keywords: Jumps, Tail Risk, Volatility, Volatility Uncertainty, Volatility-of-Volatility, Option Pricing

JEL Classification: G12, G13

Suggested Citation

Grünthaler, Thomas and Hülsbusch, Hendrik, Volatility Uncertainty and Jumps (October 28, 2019). Available at SSRN: https://ssrn.com/abstract=3169216 or http://dx.doi.org/10.2139/ssrn.3169216

Thomas Grünthaler (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitätsstraße 14-16
Muenster, D-48143
Germany

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

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