The Cross-Section of Expected Jumps in Equity Returns

Abstract

We investigate how individual equity prices react to stock specific expected jump components. We find that a portfolio buying stocks with negative expected jump component and selling stocks with positive expected jump component earns significant returns, equal to 51 basis points per month.

The returns of the spread portfolio cannot be explained by traditional risk factors and are robust to different model specifications. Furthermore, the associated risk premium is very close to the average monthly return, and remains significant after controlling for portfolio characteristics.

Keywords: jumps, equity returns, risk premia

JEL Classification: G12, C58