Volatility Uncertainty and Jumps
37 Pages Posted: 10 May 2018 Last revised: 12 Dec 2019
Date Written: October 28, 2019
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
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