On the Right Jump Tail Inferred from the VIX Market

Li, Zhenxiong and Yao, Xingzhi and Izzeldin, Marwan (2023) On the Right Jump Tail Inferred from the VIX Market. International Review of Financial Analysis, 86. ISSN 1057-5219

[thumbnail of JumpPaper_text_3Nov22]
Text (JumpPaper_text_3Nov22)
JumpPaper_text_3Nov22.pdf - Accepted Version
Restricted to Repository staff only until 17 July 2024.
Available under License Creative Commons Attribution-NonCommercial-NoDerivs.

Download (1MB)


This paper addresses the role of the right jump tail under the risk-neutral measure, as a proxy for fear-of-fear, in the return predictability implicit in the VIX market. A simulation establishes that the right jump tail dominates the left jump tail in explaining various risk measures and their associated term structures. Using VIX futures and options from 2006 until 2020, the superior predictive power for futures returns afforded by the variance-of-variance risk premium (V V RP) is shown to arise predominantly from the right jump tail risk. A separate consideration of the continuous and jump tail components of the V V RP outperforms the alternative models in an out-of-sample forecasting exercise and generates non-trivial economic value, especially over short horizons. However, the impact of right jump tail is weak on option returns and only evident for short maturities, suggesting that the fear component cannot be the sole factor explaining the observed losses incurred on the delta-hedged VIX options.

Item Type:
Journal Article
Journal or Publication Title:
International Review of Financial Analysis
Additional Information:
This is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 86, 2023 DOI: 10.1016/j.irfa.2023.102507
Uncontrolled Keywords:
ID Code:
Deposited By:
Deposited On:
19 Jan 2023 09:40
Last Modified:
18 Sep 2023 02:10