Article by: Jian Du and Nikunj Kapadia
Published by: University of Massachusetts, Amherst
Date: May 2011
“Both volatility and the tail of the stock return distribution are impacted by discontinuities (‘large jumps’) in the stock price process. In this paper, we construct model-free volatility and tail indexes in a manner that clearly distinguishes one from the other. Our tail index measures time-variation in jump intensity, and is constructed non-parametrically from the identical set of 30-day index options used to construct a volatility index. We use the indexes to examine the relative economic importance of volatility and tail in predicting market returns over 1996-2009. Over this period, our predictability regressions indicate that the rst order impact of jumps is through stock return volatility rather than the tail of the distribution.”
Full article (PDF): Link