Good Jumps, Bad Jumps, and Conditional Equity Premium

53 Pages Posted: 27 Oct 2014 Last revised: 18 Feb 2019

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Kent Wang

University of Queensland

Hao Zhou

Tsinghua University - PBC School of Finance

Date Written: February 2019

Abstract

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

Guo, Hui and Wang, Kent and Zhou, Hao, Good Jumps, Bad Jumps, and Conditional Equity Premium (February 2019). Asian Finance Association (AsianFA) 2014 Conference Paper, PBCSF-NIFR Research Paper No. 14-05, Available at SSRN: https://ssrn.com/abstract=2515212 or http://dx.doi.org/10.2139/ssrn.2515212

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Kent Wang

University of Queensland ( email )

Australia

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
86-10-62790655 (Phone)

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