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Aggregate Jump and Volatility Risk in the Cross-Section of Stock Returns

62 Pages Posted: 6 Mar 2010 Last revised: 17 Apr 2014

Martijn Cremers

University of Notre Dame

Michael Halling

Stockholm School of Economics & Swedish House of Finance

David Weinbaum

Syracuse University

Date Written: March 2014

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 can be measured separately and 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 stock returns.

Keywords: cross-sectional asset pricing, aggregate jump risk, aggregate volatility risk, option returns

JEL Classification: G10, G11, G12, E32

Suggested Citation

Cremers, Martijn and Halling, Michael and Weinbaum, David, Aggregate Jump and Volatility Risk in the Cross-Section of Stock Returns (March 2014). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1565586 or http://dx.doi.org/10.2139/ssrn.1565586

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Michael Halling

Stockholm School of Economics & Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

David Weinbaum

Syracuse University ( email )

Syracuse, NY
United States

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