Jumps in Stock Prices: New Insights from Old Data
73 Pages Posted: 17 Aug 2018 Last revised: 30 Jul 2019
Date Written: July 25, 2019
We characterize jump dynamics in stock market returns using a novel series of intraday prices covering over 80 years. Jump dynamics vary over time in an economically significant manner and low-frequency fluctuations account for a significant proportion of this historical variation. Trends in jump activity relate to secular shifts in the nature of news driving jumps. Unscheduled news, often related to major wars, drives jump activity in early decades, whereas scheduled macroeconomic and monetary news increasingly drives jump activity in recent decades. Jump variation measures forecast excess stock market returns, consistent with theoretical models featuring stochastic variation in jump activity. The predictive power of jump variation concentrates at shorter horizons, in stark contrast to diffusive variation. The differential predictive content of jump variance supports models featuring a separate jump factor such that risk premium dynamics are not fully captured by (diffusive) volatility state variables.
Keywords: jumps, discontinuities, equity premium, high-frequency data, realized variance, jump variation, stock return predictability
JEL Classification: G12, G17, C22
Suggested Citation: Suggested Citation