On the right jump tail inferred from the VIX market

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 (VVRP) is shown to arise predominantly from the right jump tail risk. A separate consideration of the continuous and jump tail components of the VVRP 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.