Do Idiosyncratic Jumps Matter?
71 Pages Posted: 4 Oct 2016 Last revised: 29 Nov 2017
Date Written: November 15, 2017
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
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