Volatility Uncertainty and Jumps

52 Pages Posted: 10 May 2018 Last revised: 15 Jul 2022

See all articles by Thomas Gruenthaler

Thomas Gruenthaler

Tilburg University - Tilburg University School of Economics and Management

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster

Date Written: October 28, 2019

Abstract

This paper analyzes the joint dynamics of S&P 500 jump risk and volatility using option-implied information. We show that the uncertainty about volatility is strongly related to the evolution of priced jump risk, but the level of volatility is not. More uncertainty about future volatility asymmetrically shifts the risk-neutral return distribution, such that the price for negative price jumps increases and the price for positive price jumps decreases. We highlight the unique information in volatility uncertainty by showing that it significantly predicts realized price jumps and returns. Our results have strong implications for option pricing models as a linear link between jump risk and volatility is commonly assumed.

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

JEL Classification: G12, G13

Suggested Citation

Gruenthaler, 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 Gruenthaler (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/view/tgruenthaler

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

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