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Aggregate Jump and Volatility Risk in the Cross-Section of Stock ReturnsMartijn CremersUniversity of Notre Dame Michael HallingStockholm School of Economics - Department of Finance; University of Utah David WeinbaumSyracuse University October 1, 2012 Johnson School Research Paper Series No. 13-2010 Abstract: We examine the pricing of both aggregate jump and volatility risk in the cross-section of stock returns by constructing investable option trading strategies that load on one factor but are orthogonal to the other. Both aggregate jump and volatility risk help explain variation in expected returns. Consistent with theory, stocks with high sensitivities to jump and volatility risk have low expected returns. Both are important economically, with a two-standard deviation increase in jump (volatility) factor loadings associated with a 3.5 to 5.1 (2.7 to 2.9) percent drop in expected annual returns.
Number of Pages in PDF File: 49 Keywords: cross-sectional asset pricing, aggregate jump risk, aggregate volatility risk, option returns JEL Classification: G10, G11, G12, E32 working papers seriesDate posted: March 6, 2010 ; Last revised: October 3, 2012Suggested CitationContact Information
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