The Decomposition of Jump Risks in Individual Stock Returns

Posted: 2 Feb 2017 Last revised: 19 Dec 2018

See all articles by Xiao Xiao

Xiao Xiao

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Chen Zhou

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: February 1, 2015

Abstract

This paper proposes a GARCH-jump mixed model for individual stock returns that takes into account four types of risks: the systematic and idiosyncratic jumps and the systematic and idiosyncratic diffusive volatility. By considering a general pricing kernel with all underlying risk factors, we decompose the expected stock return into four risk premiums related to the four types of risks. Empirically, we estimate the model jointly for daily stock returns and market returns and investigate the asset pricing consequences. We find that idiosyncratic jump intensity contributes a major part of the total jump intensity and idiosyncratic jumps are key determinants of expected stock return.

Keywords: jump-diffusion model, GARCH filtering, asset pricing

JEL Classification: C13, C61, G11, G12

Suggested Citation

Xiao, Xiao and Zhou, Chen, The Decomposition of Jump Risks in Individual Stock Returns (February 1, 2015). Journal of Empirical Finance, Vol. 47, No. 207--228, 2018. Available at SSRN: https://ssrn.com/abstract=2909962 or http://dx.doi.org/10.2139/ssrn.2909962

Xiao Xiao (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Chen Zhou

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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