Jump Risk Implicit in Options Market

Qiang Chen, Yu Han, Ying Huang and George J Jiang

Journal of Financial Econometrics, 2025, vol. 23, issue 2, 9-47

Abstract: We propose a simple procedure to recover (semi-)moments and cumulants from option data. We further derive jump risk measures based on a general asset return model with double-exponential jumps. Numerical and empirical results show that our jump variation measures outperform existing measures under specific conditions. Using return and option data on the S&P 500 index, we examine the information content of our measures, with a focus on large jumps (LJ). Our measures contribute to market realized variance and excess return prediction suggested by in- and out-of-sample tests. Accounting for LJ identified by jump variation improves market return forecast, implying a distinct impact of large and non-LJ.

Keywords: implied jumps; option prices; return predictability; large jumps (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2025
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