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Can risk-neutral skewness and kurtosis subsume the information content of historical jumps?

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  • Pan, Ging-Ginq
  • Shiu, Yung-Ming
  • Wu, Tu-Cheng

Abstract

We examine the relation between jump variations and risk-neutral moments in volatility forecasting. We propose a method that involves no extrapolation in computing the risk-neutral moments of Bakshi et al. (2003) and document that risk-neutral skewness and kurtosis subsume the information content of historical jumps. While historical jumps have significant explanatory power for future volatility and such power is actually not weakened by the inclusion of risk-neutral volatility in models, their predictability does disappear when risk-neutral skewness and kurtosis are included.

Suggested Citation

  • Pan, Ging-Ginq & Shiu, Yung-Ming & Wu, Tu-Cheng, 2022. "Can risk-neutral skewness and kurtosis subsume the information content of historical jumps?," Journal of Financial Markets, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finmar:v:57:y:2022:i:c:s1386418120300835
    DOI: 10.1016/j.finmar.2020.100614
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    1. Pan, Ging-Ginq & Shiu, Yung-Ming & Wu, Tu-Cheng, 2024. "Extrapolation and option-implied kurtosis in volatility forecasting," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Volatility forecasting; Risk-neutral moments; Jumps;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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