August 1, 2012
Both volatility and the tail of stock return distributions are impacted by discontinuities or large jumps in the stock price process. In this paper, we construct a model-free jump and tail index by measuring the impact of jumps on the Chicago Board Options Exchange’s VIXindex. Our jump and tail index is constructed from a portfolio of risk-reversals using 30-day index options, and measures time variations in the intensity of return jumps.