Do Idiosyncratic Jumps Matter?

71 Pages Posted: 4 Oct 2016 Last revised: 29 Nov 2017

See all articles by Nishad Kapadia

Nishad Kapadia

Tulane University - Finance & Economics

Morad Zekhnini

Tulane University

Date Written: November 15, 2017

Abstract

We show that idiosyncratic jumps are a key determinant of mean stock returns from both an ex post and ex ante perspective. Ex post, the entire annual average return of a typical stock accrues on the four days on which its stock price jumps. Ex ante, idiosyncratic jump risk earns a premium: a value-weighted weekly long-short portfolio that buys stocks with high predicted jump probabilities earns annualized mean returns (four-factor alphas) of 9.4% (8.1%). This strategy's returns are larger when there are greater limits to arbitrage. These results are consistent with investor aversion to idiosyncratic jump risk.

Keywords: Idiosyncratic Jumps, Risk Premiums, Cross Section of Stock Returns

JEL Classification: G10, G11, G12, G13, G!4

Suggested Citation

Kapadia, Nishad and Zekhnini, Morad, Do Idiosyncratic Jumps Matter? (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=2847221 or http://dx.doi.org/10.2139/ssrn.2847221

Nishad Kapadia (Contact Author)

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-314-7454 (Phone)

Morad Zekhnini

Tulane University ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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