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Inferring jump dynamics from weekly options: A non-parametric method

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  • Zhang, Junyu
  • Ruan, Xinfeng

Abstract

With the increasing demand for short-term information extraction, this paper explores non-parametric methods for proxying risk-neutral jumps. Empirical evidence from weekly options shows that among the approximation measures, the non-parametric jump derived from the linear term in the quadratic relationship between cubic returns and time-to-maturity has a significantly positive slope coefficient with one-day-ahead returns. In out-of-sample tests, its predictive power remains robust, showing the best performance with a short training window. Additionally, the predictive power of the jump derived from the slope of the cubic return for the two adjacent shortest times to maturity improves when both jump and risk-neutral variance are integrated into a single model.

Suggested Citation

  • Zhang, Junyu & Ruan, Xinfeng, 2025. "Inferring jump dynamics from weekly options: A non-parametric method," Finance Research Letters, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finlet:v:76:y:2025:i:c:s1544612325002296
    DOI: 10.1016/j.frl.2025.106965
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    More about this item

    Keywords

    Non-parametric jumps; Return predictability; Weekly options;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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