Stock Price Jumps and Cross-Sectional Return Predictability

45 Pages Posted: 25 Sep 2008 Last revised: 27 Feb 2013

George J. Jiang

Washington State University

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Date Written: March 1, 2012

Abstract

We identify large discontinuous changes, known as jumps, in daily stock prices and explore the role of jumps in cross-sectional stock return predictability. Our results show that small and illiquid stocks have higher jump returns, to the extent that cross-sectional differences in jumps fully account for the size and illiquidity effects. Based on value-weighted portfolios, jumps also account for the value premium. On the other hand, jumps are not the cause of momentum or net share issue effects. The findings of our study shed new lights on stock return dynamics and present challenges to conventional explanations of stock return predictability.

Keywords: stock return predictability, firm characteristics, stock price jumps, asset pricing theory

JEL Classification: G12, G14

Suggested Citation

Jiang, George J. and Yao, Tong, Stock Price Jumps and Cross-Sectional Return Predictability (March 1, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1273450 or http://dx.doi.org/10.2139/ssrn.1273450

George Jiang

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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