Good Jumps, Bad Jumps, and Conditional Equity Premium
53 Pages Posted: 27 Oct 2014 Last revised: 18 Feb 2019
Date Written: February 2019
We uncover significant asymmetric effects of realized jump risks on conditional equity premium. Negative or ``bad'' (positive or ``good'') jumps predict a rising (falling) near-term equity premium. The signed jump risk measures remain statistically significant even when we control for the variance risk premium. Negative jumps are associated with the worsening of future economic fundamentals while unrelated to short-term liquidity or market reversal. Our novel empirical findings are consistent with an asset pricing model allowing for both time-varying jump intensity and stochastic volatility of volatility to jointly affect the variance risk premium and conditional equity premium.
Keywords: Realized Jump Risk, Good and Bad Jumps, Conditional Equity Premium, Downside Economic Uncertainty, Variance Risk Premium.
JEL Classification: G10, G12, G17.
Suggested Citation: Suggested Citation