Do Jumps Contribute to the Dynamics of the Equity Premium?

48 Pages Posted: 25 Jun 2013

See all articles by John M. Maheu

John M. Maheu

McMaster University - Michael G. DeGroote School of Business; RCEA

Thomas H. McCurdy

University of Toronto - Rotman School of Management; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business

Date Written: June 24, 2013

Abstract

This paper investigates whether risks associated with time-varying arrival of jumps and their effect on the dynamics of higher moments of returns are priced in the conditional mean of daily market excess returns. We find that jumps and jump dynamics are significantly related to the market equity premium. The results from our time-series approach reinforce the importance of the skewness premium found in cross-sectional studies using lower-frequency data; and offer a potential resolution to sometimes conflicting results on the intertemporal risk-return relationship. We use a general utility specification, consistent with our pricing kernel, to evaluate the relative value of alternative risk premium models in an out-of-sample portfolio performance application.

Keywords: Jumps, Higher-order moments, Skewness, Kurtosis, Equity Premium

JEL Classification: G11, G12, C22

Suggested Citation

Maheu, John M. and McCurdy, Thomas H. and Zhao, Xiaofei, Do Jumps Contribute to the Dynamics of the Equity Premium? (June 24, 2013). Journal of Financial Economics (JFE), Forthcoming; Rotman School of Management Working Paper No. 2284276. Available at SSRN: https://ssrn.com/abstract=2284276

John M. Maheu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://profs.degroote.mcmaster.ca/ads/maheujm/

RCEA

Via Patara, 3
Rimini (RN), RN 47900
Italy

HOME PAGE: http://www.rcfea.org/

Thomas H. McCurdy (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3425 (Phone)
416-971-3048 (Fax)

HOME PAGE: http://www-2.rotman.utoronto.ca/~tmccurdy

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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