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Jump Risk Implicit in Options Market

Author

Listed:
  • Qiang Chen
  • Yu Han
  • Ying Huang
  • George J Jiang

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.

Suggested Citation

  • Qiang Chen & Yu Han & Ying Huang & George J Jiang, 2025. "Jump Risk Implicit in Options Market," Journal of Financial Econometrics, Oxford University Press, vol. 23(2), pages 9-47.
    • Handle: RePEc:oup:jfinec:v:23:y:2025:i:2:p:9-47.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbaf002
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    More about this item

    Keywords

    implied jumps; option prices; return predictability; large jumps;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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