Understanding Jumps in the High-Frequency VIX

Abstract

I conduct a comprehensive nonparametric study of volatility jumps and leverage effect by examining high-frequency data on the VIX and S&P 500 from 1992 to 2010. I argue that the VIX data prior to 1998 are too noisy to provide a reliable inference. After 1999, the dataset is cleaner but still controversial. More specifically, the high-frequency dynamics of the VIX jumps challenges the assumptions of commonly used stochastic volatility jump-diffusion models. I explain this phenomenon by hypothesizing that most jump-like movements in the VIX are "pseudo-jumps" i.e., these jumps are large but temporary deviations from fundamental values.