Jumps in Stock Prices: New Insights from Old Data

73 Pages Posted: 17 Aug 2018 Last revised: 30 Jul 2019

See all articles by James A Johnson

James A Johnson

University of Georgia, C. Herman and Mary Virginia Terry College of Business, Students

Marcelo C. Medeiros

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Bradley S. Paye

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Date Written: July 25, 2019

Abstract

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

Johnson, James A and Cunha Medeiros, Marcelo and Paye, Bradley S., Jumps in Stock Prices: New Insights from Old Data (July 25, 2019). Available at SSRN: https://ssrn.com/abstract=3226013 or http://dx.doi.org/10.2139/ssrn.3226013

James A Johnson

University of Georgia, C. Herman and Mary Virginia Terry College of Business, Students ( email )

Athens, GA
United States

Marcelo Cunha Medeiros

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil
+55 21 3114-1078 (Phone)

Bradley S. Paye (Contact Author)

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

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